The Outsourcing Dilemma - The Search for Competitiveness.pdf

theoutsourcing 

dilemma

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theoutsourcing 

dilemma 

the search for competitiveness 

J. Brian Heywood 

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First published in Great Britain in 2001 

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about the author 

My own involvement in the world of commerce began many years ago with a succession 

of roles in sales, market research, advertising and brand management. This experience 

eventually gained me a position as UK head of an American toiletries company. This was 

followed by a period of four years with a major management consultancy in the UK. I 

then spent four years based in the USA. During the last three of these years I was 

President of an American Food Company. 

Since my return to the UK I have worked as an independent consultant largely to 

indulge my own and my family’s desire to live on the south coast of England. During this 

period I also set up a marketing research company and have had a continuous involvement 

in this area. Some of my direct consultancy work has been via major consultancies and 

some has been done on an independent basis. Consequently, my ‘clients’ have ranged from 

the very large to the very small. Most of this consultancy work has been in areas related to 

marketing, business systems and in outsourcing. In recent years I have made a speciality of 

helping outsourcing service providers to find and get into new markets. 

Amongst my successes I can claim technology research work that was used as the basis 

for futuristic television programmes around the world and a marketing award for helping 

small consultancy clients increase their sales. Amongst my failures are two attempts to set 

up manufacturing companies utilizing new technologies.

contents 

Introduction 

ix 

1 Changing times in commerce 1 

2 How can an organization become and stay competitive 9 

3 The outsourcing alternative 25 

4 Reasons for outsourcing the various business functions 35 

5 Variations on the outsourcing theme 57 

6 Points to be aware of when choosing a service provider 67 

7 The process of choosing a service provider 77 

8 Potential drivers of outsourcing 99 

9 Risks and concerns for both parties 105 

10 What does all this mean 113 

11 An alternative way of approaching the competitiveness problem 123 

Appendix A: Starting the outsourcing process 143 

Appendix B: Before contemplating the outsourcing transition 159 

Appendix C: The essential elements of the contract 173 

Appendix D: The rights of transferred staff 185 

Index 201

introduction 

Both the title of this book The Outsourcing Dilemma and the sub-title The Search for 

Competitiveness deal with the most frequently asked question in business today: ‘How can 

we become competitive and remain competitive over all our business processes’ My conclusion 

is that outsourcing is probably the answer, but it is likely to be a different type of 

outsourcing from what is generally practised today. 

Outsourcing is not something that can be considered in isolation. It has become a major 

factor in commerce because the dramatic advances in technology over the last few decades 

have created an almost intolerable situation for everybody involved in management. 

Managers in all organizations must now seek to achieve maximum competitiveness in performing 

all business processes. In order to do this, they must constantly evaluate the 

technology on offer and try to achieve performance improvements with what is usually a 

less than adequate internal skills base. Quite frequently, the need to bring about the desired 

change is both sudden and dictated by an external organization, for example, when supermarket 

chains began to demand that their suppliers utilized Electronic Data Interchange 

(EDI) systems. In these circumstances, the use of full-time external specialists through outsourcing 

has become an important solution to the problem of maintaining competitiveness. 

However, outsourcing is just one possible solution to the competitiveness problem and 

any reasonable evaluation of the subject must logically compare it to other options that 

are being used or could be developed to enhance a competitive position. Most of these 

options have considerable merit even if they are not always equally applicable to all types 

and sizes of organization. However, whatever their merits and demerits, the truth is that 

all these theoretical solutions fail far too often in practice. I suggest, though, that the current 

failure rate of performance improvement projects is only tolerated because the full 

extent of failure is disguised; few organizations or individuals are willing to admit the 

extent of failure on a major project. 

The vast majority of attempts to become more competitive can be divided into two 

parts: the internal solutions, which involve some type of performance improvement project, 

and the various external outsourcing options. All further references to internal 

projects in this book are to major projects that involve organizations in costly attempts to 

improve performance. 

The results of a high technology project failure can be very damaging. The general 

public is constantly being reminded of the risks involved with high technology projects 

because they suffer as a result. In the UK, for example, the Department of Social Security 

has had a succession of computer disasters going back over many years, affecting many

x 

the outsourcing dilemma 

thousands of people and in 1999 50,000 people had their holiday plans disrupted when the 

Passport Agency’s new project ran into trouble. Why is the consequence of failure not normally 

given adequate consideration prior to approving major projects This is a particularly 

vexing question when one considers the number of research reports that have been published 

in recent times giving clues to senior managers regarding the potential for failure. 

The main reason is, of course, that major projects are normally conceived to correct a 

current problem that is seen to be damaging the organization’s competitive position and 

is likely to get worse. Consequently the senior management believe that the problem has 

to be corrected as soon as possible because the responsibility is clearly theirs. In such circumstances 

there is a certain amount of logic in the argument that goes: ‘As the core 

problem had not been anticipated earlier we have no alternative but to carry out this 

project, so let’s not dwell on the risk of failure, let’s make sure it is a success’. 

In a great many projects the senior management have a vested interest in not making the 

targets too difficult or the parameters for success too precise, because this will increase the 

chance of being seen to fail. Most senior managers will from time to time be faced with 

choosing between a project that is likely to provide the maximum benefit for the organization 

but will take a number of years before worthwhile results are seen, and another project that 

may be more expensive but will provide quicker results. As the tenure of office of senior managers 

gets shorter and shorter, it is only natural that managers increasingly look for short-term 

glory even though this may not be in the best interests of the organization. Centaur 

Application Software Services, the Aylesbury-based firm of management consultants, experienced 

this at first hand in 1995 when they carried out a series of direct selling calls on UK 

Finance Directors, warning of potential Y2K difficulties and offering a service to correct the 

problem. The consultancy was surprised by the number of FDs who openly made comments 

such as ‘Five years is a long time off and it is likely to be someone else’s problem then’. 

A further indication of the declining tenure of office for senior managers came to light 

in late 1999 when the market research company TSS was asked to check certain marketing 

databases. Over a three month period earlier that year TSS called 600 of the 2000 

largest organizations in the UK and established amongst other things, the name of the 

Finance Director. In one month late in the year they called all these organizations back 

again and found that during the six to nine month intervening period, just over 10 per 

cent of the organizations had obtained new Finance Directors. 

Whatever the reasons, the risk of failure with major projects never seems to exercise 

the corporate mind to the extent it should. Only for a brief period did this subject get 

anywhere near the attention that it deserves. That was a few years ago when the American 

CSC Index for 1994 reported on a survey of 600 organizations and claimed that as many 

as 67 per cent of these companies reported zero or only marginally improved results from 

their business process re-engineering (BPR) projects. Even then, the concern was that 

BPR projects (which had previously been considered almost foolproof) could fail and not 

the fact that more projects had failed than had succeeded.

introduction 

xi 

If, despite the natural internal desire to disguise failure, published reports can suggest 

that up to two thirds of projects fail – what must the true failure rate be 

We may never get an accurate reading for the number of project failures. Certainly, no 

amount of market research will settle this question. Apart from the problem of not being 

fully aware of the parameters and targets that are set for all the projects carried out, there 

is the question of how you measure success or failure when so few people are willing to 

admit the full extent of failure. All that the researchers who study these projects can normally 

claim is that failure rates are bound to be much worse than admitted. 

At this point I must define what I mean by failure. These days any internal project 

begun with the objective of improving performance will be very likely to require considerable 

expenditure on new technology and external advice whilst also incurring the often 

difficult to quantify expense caused by disruption of normal activity. However, the real 

cost of such projects does not end there. A project to implement a new finance system, 

for example, can only be contemplated by most organizations once every five to seven 

years. Whatever the targets set, the logical minimum requirement from the project will be 

to put the service in question on a competitive basis immediately following the implementation 

and at the very least provide some hope for further improvements until a 

replacement project is put into action in the future. My definition of failure is reached by 

asking: ‘Did the project achieve the minimum competitive requirements and was it still 

providing a competitive solution two years after implementation’ If it did not it is a failure 

and it remains a failure even if it was finished on time and to budget. It is a failure 

because the opportunity has been lost and it will be some time before the problem can be 

corrected. Conversely, I would rate the venture a potential success if it achieved the 

desired competitive performance levels but cost and time deadlines were narrowly missed. 

My definition of a failed outsourcing project is also based on meeting the minimum 

competitiveness criteria. It used to be easy to spot the extreme outsourcing failures as 

these usually ended up in a courtroom, but many outsourcing contracts now contain provisions 

for dealing with disputes and therefore avoid the need to go to court. These 

special provisions will often stipulate the penalties the service provider must pay if the 

service fails to meet a certain standard. The trouble is that only on rare occasions will the 

outsourcing service provider have agreed to a minimum level of service that equates to 

competitiveness for the client. 

In most outsourcing arrangements the service provider agrees a cost that is lower than 

the client is currently incurring but accepts a service target in excess of what the client is 

achieving. Having got such a deal, most client’s eventually accept that the minimum service 

level should be set close to the client’s own performance level, even though this may 

be far from competitive. 

Given these circumstances, the service provider’s staff will often convince themselves 

that they are doing a good job even though their performance only moves between the 

minimum service level and the targets set. Many outsourcing agreements go on like this

xii 


year by year, with the service never quite falling to a level likely to cause a breach of the 

contract, but with the client nonetheless dissatisfied. But claims that more than a third of 

outsourcing contracts are never renewed, despite the cost of taking the service back or 

transferring it to another provider, give some clue about latent client dissatisfaction. As 

with internal projects, the real cost relates to the missed opportunity which cannot normally 

be corrected until the end of the contract. 

An organization worried about its ability to bring about a performance improvement 

internally might well compare the limited experience and success it has previously 

enjoyed in this respect with the outsourcing specialist that carries out such projects on a 

frequent basis. From this point, it is a natural step to look for a service provider that can 

demonstrate success in the relevant area. However, this does not always guarantee a long 

and happy relationship. For example, CSL, the outsourcing division of Deloitte & 

Touche, had been very beneficial to the London Borough of Croydon when taking over 

its housing benefits system. Success in this area with this client led to CSL getting similar 

work for other local authorities. But in March 2000 the Chief Executive of CSL apologized 

for housing benefit disasters his organization were involved with at Sheffield City 

Council and a local authority in Somerset. There have also been problems between the 

London Borough of Islington and its housing benefits administration provider, ITNet. It 

would appear that at least part of the problem in this area of housing benefits has been 

repeated changes to the system by the government. However, many of the local authorities 

that kept this service in house have coped far better with these changes. 

If both the internal and external options frequently fail, what can be done to resolve 

the performance improvement problem Chief executives might be tempted to consider 

one of the alternative internal solutions that they have not yet tried. There are a number 

of alternative solutions in the form of management theories, with each new one appearing 

more radical than the previous one. Almost all make good sense and can be adopted 

completely if the circumstances are right. For example, ‘Get rid of middle management’. 

It is certainly possible to find instances where organizations have benefited enormously 

from removing almost all middle management. Against that, many others now believe 

that even the modest reductions they made in middle management numbers has worsened 

rather than improved overall performance. This does not prove that it’s right or 

wrong to get rid of middle managers – just that it may not be the ideal solution in all 

organizations at all times. Even where it does work, what do you do for an encore when 

you are asked to make further reductions to costs 

The call to ‘Empower all employees to act like Chief Executive Officers’ has also been 

widely promoted. Examples detailing success, however, largely concentrate on the benefits 

of letting widespread local service agents make most of their own decisions. It is difficult 

to see too many organizations introducing this concept completely in the average factory 

or in government offices and even more difficult to imagine how it would work. Perhaps 

the most radical of these proposed solutions can be found in the call to ‘Forget change,

introduction 

xiii 

it’s time for revolution’. Again, the revolutionary or ‘start again’ approach to restructuring 

business functions has been responsible for some successes, but in the real world not every 

organization believes it can find a suitable time to begin a revolution. 

Internal performance improvement projects are normally very expensive, time and 

resource consuming and prone to failure. Likewise outsourcing projects are also normally 

very expensive, time and resource consuming and prone to failure. The radical solutions 

will work for some, but most organizations would not even consider taking such steps on 

the grounds that their use would be inappropriate ‘at this moment in time’. 

Given these problems, it is necessary to ask: ‘Is there a performance improvement 

answer “for the rest of us”’ Is there some way that the average organization can become 

competitive in its non-core functions, thereby improving overall competitiveness Could 

we find an answer for the majority of organizations that goes further than the aims of the 

in-house, external and radical solutions discussed, i.e. one that enables the organization to 

remain competitive long after the change has been adopted Web-enabling developments 

do offer some prospect for improvements in this area, but in addition, I believe that there 

is one simple solution that could be utilized by a significant number of organizations and 

it is explained in the last chapter of this book. 

Back to the structure of the book. I have abbreviated the history of the subject matter 

and avoided detailed case histories because they tend to suggest that everything relating to 

the project concerned was a lasting success and this is not always the case. 

The aim of this book is to present the arguments as fairly as possible and to suggest 

ways in which the monumental problem of maintaining competitiveness might be 

approached. In order to make the story flow, the main body of the book is confined to 

issues that need to be considered before taking a decision to outsource and most of the 

more technical ‘how-to’ outsource considerations are relegated to appendices. 

Chapter 1 – deals with the changing times that have brought about the need to be competitive 

in all the functions and processes undertaken by organizations. 

Chapter 2 – starts by asking the question ‘How can you become competitive’ and then 

runs through the various internal solutions to the problem and questions the likelihood 

of success from pursuing these options. 

Chapter 3 – introduces outsourcing, the external solution and probes the advantages and 

disadvantages of this option. 

Chapter 4 – examines the extent to which outsourcing is currently being practised and the 

functions being outsourced. 

Chapter 5 – looks at the growing range of alternatives to full outsourcing, including the 

various types of Shared Service Centres and the potential for ASP developments. 

Chapter 6 – lists a range of factors that potential clients should know about outsourcing service 

providers and makes suggestions as to how to avoid some of the resulting problem areas.

xiv 


Chapter 7 – outlines a number of factors to consider when choosing an outsourcing 

service provider. 

Chapter 8 – details the potential benefits from outsourcing. 

Chapter 9 – describes the real risks and concerns for both parties. 

Chapter 10 – summarizes the alternative options towards achieving lasting competitiveness. 

Chapter 11 – introduces ‘Business Satellites’, a long-term competitiveness option that does 

not require short-term dramatic change, expense and disruption. A number of theoretical 

Business Satellite ideas are developed to further illustrate how the concept might work. 

Appendix A – a step-by-step procedure illustrating the various dos and don’ts for those 

client organizations interested in a conventional outsourcing arrangement. 

Appendix B – actions necessary before the outsourcing transition gets underway. 

Appendix C – a list of factors that should go into a conventional outsourcing contract. 

Appendix D – the legal problem of transferring staff to an outsourcing service provider. 

The relatively recent creation of the internet makes all current attempts at forecasting the 

commercial future hazardous, if not meaningless, because the potential for change cannot 

yet be fully understood. It is possible for example, that the current problems associated with 

major internal projects and outsourcing could be eased considerably by Web-enabling 

developments. At the time of writing there is great uncertainty about the potential for the 

application service provider (ASP) concept, which, in theory, would help to reduce software 

and other IT costs dramatically and make some types of outsourcing a more simple and 

acceptable concept. I am aware of some sizeable organizations that see the potential for 

Web-enabled software as an excuse to postpone projects until the situation becomes clearer. 

They may turn out to be right to delay, but the problem is not only the cost and availability 

of the technology but also finding enough suitably qualified people to deal with the technology, 

and that problem is not going to go away in the short or medium term. 

If forecasting is difficult, it is probably also correct to say that no one is really qualified 

to successfully analyze what is currently happening in the world of commerce. It is all 

happening and changing too quickly for that to be possible. Nevertheless, I am certain of 

two facts: the first is that there is no one solution that is suitable for all types and sizes of 

organizations; and the second is that given the failure rate of current performance 

improvement projects, some long-term alternatives have to be found. 

For what it is worth, my own involvement in the world of commerce began many 

years ago with a succession of roles in sales, market research, advertising and brand management. 

This experience eventually gained me a position as UK head of an American 

toiletries company. This was followed by a period of four years with a major management 

consultancy in the UK. I then spent four years based in the USA. During the last three of 

these years I was President of an American Food Company.

introduction 

xv 

Since my return to the UK I have worked as an independent consultant largely to 

indulge my own and my family’s desire to live on the south coast of England. During this 

period I also set up a marketing research company and have had a continuous involvement 

in this area. Some of my direct consultancy work has been via major consultancies 

and some has been done on an independent basis. Consequently, my ‘clients’ have ranged 

from the very large to the very small. Most of this consultancy work has been in areas 

related to marketing, business systems and in outsourcing. In recent years I have made a 

speciality of helping outsourcing service providers to find and get into new markets. 

Amongst my successes I can claim technology research work that was used as the basis 

for futuristic television programmes around the world and a marketing award for helping 

small consultancy clients increase their sales. Amongst my failures are two attempts to set 

up manufacturing companies utilizing new technologies. 

The title of this book The Outsourcing Dilemma deals with the most frequently asked 

question in business today: ‘How can we become competitive and remain competitive over 

all our business processes’ My conclusion is that outsourcing is probably the answer but it 

is likely to be a different type of outsourcing than is generally practised today.

chapter 

1 

changing times in commerce 

Introduction 3 

What is so different about 

competitiveness now 4 

Benchmarking 6

changing times in commerce 3 

Introduction 

In a famous eighteenth century children’s story, a man called Rip Van Winkle went to bed 

one night and fell into a deep sleep that lasted for many years. The timeless appeal of the 

story is largely based on Rip’s reaction to the changes he found when he awoke and the 

perceived overall effect of mankind’s ingenuity on changing and ‘improving’ the way 

people live over time. When the story first appeared in print it was credited with forcing 

many people to think for the first time about changing lifestyles. 

Although there have been few periods in human history when inventions and 

improved ways of working were not being created, it was clear well over a hundred years 

ago, that each new century produced disproportionately more developments than the 

preceding one and that this trend was likely to continue. It was also clear that every so 

often it became almost meaningless to keep looking for improvements in an area that had 

been made obsolete by a new invention. Therefore, once the gun had been invented it 

made more sense trying to produce a better gun than an improved sword. 

The changes that traumatized the fictional Rip Van Winkle would, of course, be quite 

modest when compared to what we now all experience over just a few short years and we, 

of course, are only too aware that the rate of change is accelerating all the time. In fact the 

rate of change is now so marked that we sometimes fail to see that we are still trying to 

make the equivalent of an improved sword, when we should be looking in an entirely different 

direction. 

Using the Rip Van Winkle theme, we can illustrate the accelerating rate of change in 

commerce by stating that a senior executive unfortunate enough to slip into a coma in 

1945 would, on returning to full health 15 years later in 1960, have experienced relatively 

few business problems that were outside his understanding and experience. It is quite 

likely, therefore, that if he returned to his old job, he could have done so without finding 

too many surprises in terms of technological and procedural changes. 

A similar unfortunate going into a coma in 1985 and attempting to return to work in 

2000 would find a very different situation. He or she would have a much more difficult 

task adapting to the changes in technology and more importantly, the effect these changes 

have had on business practice. 

However, having experienced the same business environment in ‘snapshots’ 15 years 

apart, the year 2000 returner would probably see one problem, currently considered by 

many to be ‘almost beyond solution’, much more clearly than those of us who worked

4 


the key problem facing 

management at the 

start of this century – 

the need to be 

competitive in all the 

various functions of 

business – appeared 

to be far less 

important in 1985 

through this period. This is so because the key problem 

facing management at the start of this century – the need 

to be competitive in all the various functions of business– 

appeared to be far less important in 1985. Consequently, 

the current emphasis on competitiveness would be very 

marked to anyone who missed the years in between. 

What is so different about 

competitiveness now 

Until the last decade or so of the last century, established organizations usually had sufficient 

time to adjust to all but the most catastrophic changes in business circumstances. If, 

for example, a company’s sales increased or decreased unexpectedly, the change invariably 

took place at a rate that was, in corporate terms, easily controllable and not usually seen 

as a reason for undue concern. In many cases it was just a matter of adjusting the number 

of employees and the long established organizations built up considerable expertise in 

handling problems of this type. Having made the necessary corrections, it was normal to 

expect that no further change would be necessary to that area for at least a year or so. 

Fundamental to this expertise was the creation of business structures or functions that 

developed according to the type of organization, i.e. public sector organizations would be 

mainly broken down into administrative functions and manufacturing concerns would be 

split into manufacturing, finance, sales, etc. In each organization the various functions 

would come under the control of senior managers who were specialists in their respective 

areas. In this way the various business activities or processes were grouped together to 

make them easier to manage. One effect of grouping these processes into distinct functions 

was the creation of hierarchies, which in turn often produced layers of middle 

management in the functions. 

During the early to middle part of the century, a certain ‘sameness’ developed in organizations 

in similar business areas and industries. For example, up until the 1970s, food 

manufacturers tended to have the same functional areas and structure within functions, irrespective 

of size or country of manufacture. In effect, business ‘norms’ had been created by 

which the senior managers could, to some extent, judge their own performance. By and 

large this came about because senior executives tended to look for jobs within the sector 

they understood and employers almost always believed that knowledge of their sector was 

essential, even when they were recruiting for non-core functions. For most of the century 

this was senior management’s main guide as to how the various functions should be constructed. 

Having developed in this way, the functions would frequently operate as 

independent units between which there was sometimes only occasional contact.


Only on very rare occasions did anyone seriously challenge this type of structure. 

Those that did were mainly academics and their arguments largely failed because they 

could not come up with suitable alternatives. The perceived business wisdom, therefore, 

was that an ideal method of managing an organization had developed over many years 

and it had been tried and tested – so it had to be right. Given these circumstances it was 

normal for changes to be made to one function in isolation from other parts of the organization. 

Even when management consultants were brought in to try to improve 

performance they often looked for savings from the relevant function without considering 

the full impact elsewhere in the organization. Organizations were thus guilty of 

looking in on themselves and to some extent ignoring the accelerating change that was 

affecting their marketplace and individual customers. 

During the 1990s all this began to change. The competitive pressure became so strong 

that the continued existence of everything and everyone in business was soon being challenged. 

Technology developments changed some processes, made others obsolete and 

effectively moved some from one function to another, e.g. from finance to IT. The management 

theorists began to argue that the time had come to knock down the hierarchical walls 

and create a flatter, more competitive management structure by getting rid of middle management. 

Over the last few years management structures have got notably flatter in many 

organizations, with many of the redundant middle managers being used in new, often technical 

specialist, roles that reflect the organizations’ changing circumstances. 

Heads of functions dealing with these changes were therefore under pressure from an 

unprecedented number of directions. Apart from the usual problems of maintaining the 

quality of their service, they had to contend with the threat to their empires and cope 

with naturally concerned subordinates. 

A number of factors were responsible for creating this situation. These included the globalization 

of commerce, benchmarking, dramatically improved communications, as well as a 

range of other technology developments, which frequently 

emerged as packaged software. 

Taken all together, these changes and threats add up to 

in future each 

one conclusion – in future each manager’s main responsibility 

is to achieve and maintain the competitiveness of the responsibility is to 

manager’s main 

processes that are under his or her control. Obviously, achieve and maintain 

competitive pressure has always existed for the majority of the competitiveness 

organizations but in the 1990s it took on a new momentum 

and meaning, simply because its importance was 

of the processes that 

are under his or 

becoming more obvious. 

her control 

The importance of the competitive issue is illustrated by 

the fact that a significant proportion of the articles and books 

currently being printed on business subjects, concentrate in 

some way or other, on the problem of how to be competitive and remain competitive.

6 


We must now accept that there is both a threat and an opportunity continuously present 

in every function in every organization. Manage the function well and you have a 

competitive advantage; manage it badly and you will be in trouble. If you performed the 

function badly in the 1990s you were more likely to suffer than if you did so in the 1980s 

and if you do it badly in the first few years of the new millennium, then your corporate 

house is going to come under pressure that much quicker. 

All procedures and processes must now be analyzed continuously and, ideally, collectively. 

It is no longer possible to concentrate on a few ‘key’ tasks and leave the others to 

look after themselves. It is now rarely correct to look at performance levels of functions in 

isolation. Each function is part of a body that is being continuously pushed and pulled by 

increasingly strong competitive forces and you need to know the direction the body is 

going in to justify any significant change. 

With this in mind it is interesting to compare the PR handouts issued by the major 

management consultancies over the years. In the 1980s a typical claim would illustrate 

what the consultancy had achieved in function X for client Y. Now consultancies like 

Booz-Allen & Hamilton appear to limit their PR case histories to where they have 

worked with the client across all its functions on a single project. 

For many organizations, the internet has only just started to influence the competitive situation 

but few can be in any doubt that it will make the situation more rather than less 

difficult to control. The net result of all of this is that you cannot be sure that the savings and 

improvements you made this month will be sufficient to keep you competitive next month. 

Benchmarking 

In addition to all their other worries, the functional heads have to consider that the development 

of benchmarking techniques, in theory at least, now provide their chief 

executives with a good guide to the relative performance of each function. 

In recent years, the concept of ‘benchmarking’ has 

grown in importance without ever being as widely used as 

benchmarking has 

become one of those 

concepts that can 

influence an 

organization even 

where it is not being 

practised internally 

it could be. Benchmarking has become one of those concepts 

that can influence an organization even where it is 

not being practised internally. For example, the publication 

of a report a number of years back showing that it 

cost one American meat packing plant 25 cents to produce 

an invoice, quite naturally caused concern to directly 

competitive finance directors, some of whom had an 

invoicing cost up to 12 times as large. More surprisingly, 

perhaps, the same report was mulled over by very different


organizations, including manufacturing and financial services groups, all over the world. 

Simply knowing that such a wide disparity could exist in an industry that was made up of 

simple, apparently easily controllable ‘manufacturing’ processes, caused executives to look 

more closely at their own situation. 

Gradually, an increasing number of such benchmarking reports put pressure on functional 

heads all over the world, as chief executives sought to explain ever increasing costs. 

Even where attempts at benchmarking have been badly thought out, or failed for other 

reasons, the concept has been fully accepted. The key fact in all of this is that benchmarking 

techniques will continue to improve and gradually functional heads in even quite 

small organizations will know what is achievable for an organization of their type and 

size, in terms of costs and service levels. The internet-based Benchnet organization claims 

over 2500 member organizations in 50 countries and it is apparent that new members 

offering benchmarking services across a wide range of functions are joining Benchnet 

every day. 

Clearly all heads of functions now have to consider the question of competitiveness 

much more seriously than their counterparts in 1985. The key question is: what can they 

do about it

chapter 

2 

how can an organization become 

and stay competitive 

Methods normally taken to 

improve performance 12 

Management techniques developed 

to improve performance 12 

The packaged software solution 

to performance problems 13 

Using management consultants 15 

How effective are performance 

improvement projects 17 

Are you just tinkering with 

the systems 19 

Becoming ‘world class’ 20 

The reason for concern 21

how can an organization become and stay competitive 11 

Although some of them were loath to accept it, the governments of virtually every country 

in the world now acknowledge that they cannot create wealth for their citizens – that 

has to be done by the business community and in particular the entrepreneurs. The 

importance of being competitive is nevertheless recognized by most governments and 

many of them now attempt to provide direct help and advice on the subject for their 

business communities. 

In some countries entrepreneurs can still base their schemes on the availability of raw 

materials and or cheap labour. Given such circumstances the entrepreneur may not initially 

need to put too much emphasis on controlling costs and improving service. 

In most of the developed world, however, any competitive edge must be found via 

knowledge, skills and creativity improvements. Sadly, not all these benefits continue over 

the long term, because modern technology has a habit of distributing most of the knowledge 

and skills developments around the competition, quite quickly. 

In the period following World War II, the solution to the competitiveness problem 

appeared to many people to be quite straightforward. They argued that organizations had 

to keep extending their customer base until they were operating in as wide an international 

arena as possible. Continuous expansion in this way met the pressure of competition by 

spreading costs and revenue on a global scale. Many large corporations have achieved an 

ongoing competitiveness by deliberately positioning themselves on a global basis. 

Nevertheless, it is not a solution that all organizations can aspire to and it can only be a 

part solution to the giants of commerce because eventually they must run out of new territory 

to conquer. Coca-Cola has a global image but can never relax its efforts because Pepsi 

and other competitors have also obtained a global or near global status. 

Competitiveness will normally involve some mixture of 

quality, continuous service improvement, speed of performance 

and cost reduction. The exact mix will depend 

upon the nature of the organization. Globalization by itself 

can therefore never be a complete answer even for the 

larger organizations. For every organization that has 

attempted to solve the competitive problem by globalization 

there must be hundreds who just rely on cutting costs. 

Organizations that lurch from one cost-cutting exercise to 

another are usually hoping that if they keep reducing costs 

then eventually they will gain access to a creative breakthrough 

that solves their problem. 

competitiveness will 

normally involve 

some mixture of 

quality, continuous 

service improvement, 

speed of 

performance and 

cost reduction

12 


The trouble with this line of reasoning is that real creative breakthroughs, although happening 

faster than ever before, are not a daily occurrence. For most of the time, therefore, 

executives who are constantly under pressure to make ‘savings’ can only contribute to the 

competitive situation by looking for cost reductions and consequently spend less than the 

necessary time on much needed service improvements. Such savings are frequently made 

from within a function and without knowledge of the situation facing the entire organization. 

As a result this action may, in some circumstances, be counter-productive. 

To return to the question raised at the beginning of this chapter – how can an organization 

find or create the resources necessary to be competitive in everything it does The 

important second part of this question is: If an organization manages to achieve a suitably 

improved level of performance in all functions, how long would it be reasonable to expect 

all of these functions to remain competitive 

Methods normally taken to improve performance 

Although there are no golden or set rules to determine what management can or cannot 

do to improve performance, the following three elements account for most of the effort 

currently made when an internal solution is sought. Increasingly, for major organizations, 

at least, all three are brought together in one project. 

● 

● 

● 

The use of management techniques 

Implementing packaged systems and other technology 

Using management consultants. 

Management techniques developed to 

improve performance 

In recent times, a plethora of management tools, techniques, ideas and methodologies, 

such as value engineering, change management, best practice and business process reengineering 

(BPR) have been developed to assist executives to achieve a strong 

competitive situation. 

Perhaps the most successful and widely promoted management technique of the last 

decade has been BPR, devised by Mike Hammer and James Champy. Whereas techniques 

such as total quality management (TQM) concentrate on improving existing 

processes, BPR requires the organization to rethink and redesign the process to bring it 

into line with customer needs. A successful BPR exercise will involve a number of distinct


steps, starting with identifying the customer needs and ending with the redesign and 

implementation of the new process. 

Some dramatic improvements in performance (15 to 50 per cent) have been claimed 

for successful BPR exercises. Against that it is sometimes reported that BPR projects fail 

more often than they succeed. 

It goes without saying that all the management techniques have merit and will have 

benefited some of the organizations that have used them. It is equally possible that the 

vast majority of organizations would have obtained real benefit if the projects had been 

designed or carried out correctly. 

Why should a technique that is so successful for some organizations fail when it is 

applied to others Lack of or poor specialist advice is frequently blamed, but the ultimate 

responsibility for failure must lie with senior management. Senior management must take 

responsibility for performance improvement projects. In doing so they must understand 

what is required to bring about successful change and empower the project leader to 

bring about or recommend all the changes necessary. In addition they must be prepared 

to pass up the chance of limited short-term success if the best interests of the organization 

are best suited by a more long-term approach. 

Questions 

Has your performance reached truly competitive levels from using one 

of these techniques 

Do you think that utilizing one of these techniques will enable you to 

achieve and maintain a competitive standard 

The packaged software solution to 

performance problems 

In both North America and Europe, a few major companies are still using bespoke systems 

that were first installed in the 1970s or even earlier and have been added to and 

updated ever since. Most organizations, however, prefer to buy packaged solutions to 

control their main business functions. For them any significant improvements in the 

packaged systems available are welcome if their availability coincides with a previously 

perceived need to change systems, and unwelcome if what is now accepted as an inferior 

system has just been implemented. 

In the late 1970s the software vendors and consultancies dealing in financial systems 

software often described their product as ‘good for five years in present form’, and in 

addition promised regular updates. In practice, a significant number of organizations

14 


bought new software from other vendors well within five years, but hoped that this time 

they would not be called upon to go through the considerable expense and upheaval of a 

further implementation in the near future. Almost invariably they were again forced to 

implement new systems from a different vendor well before the anticipated life of the 

system was exhausted or struggle on with a system that was no longer competitive. 

Typically, the reasons given for further changes were as follows. 

● 

● 

● 

● 

The promised benefits from the existing system were never obtained. 

Our business is changing and the existing system cannot meet our future needs. 

It would cost too much to modernize the existing system. 

Better systems have become available recently which will enable us to provide a more 

competitive service. 

most organizations 

seriously 

underestimate the 

cost of implementing 

new systems by 

making ‘working life’ 

assumptions that are 

never normally 

Experience shows that most organizations seriously underestimate 

the cost of implementing new systems by making 

‘working life’ assumptions that are never normally achieved. 

The cost and disruption caused by such change is 

therefore increasing. The need to change major systems 

and the fear of failure is the key reason why organizations 

begin to consider outsourcing functions like finance. 

Over the last few years of the 1990s the implementation 

of Enterprise Resource Planning (ERP) systems has 

been promoted as a major solution to keeping process costs 

low and the service at a competitive standard. However, 

most organizations struggled to find the right quality of 

staff when they implemented specialist ‘best of breed’ 

financial and manufacturing systems. Why should the situation be improved when organizations 

implement even more complicated integrated systems 

Unfortunately, the need to change systems now appears to be happening more frequently, 

with some organizations having switched from one ERP supplier to another 

within three years of completing the first ERP implementation. 

Confidence in this type of solution was still high in early 2000, but in mid to late 

2000 negative publicity began to appear at an increasing rate. For example, PA 

Consulting reported that 92 per cent of organizations in a research exercise they had carried 

out, admitted that their ERP project (some of which had taken four years to 

implement) had failed to meet the targets set. 

These failures have been explained by assuming that the main problem is due to the 

fact that project teams were attempting to do something they had never tried before and 

comparisons are being made, for the same reason, with the high failure rate of Data 

Warehousing projects. Senior management groups are nonetheless being advised that


other new concepts, such as Customer Relationship Management (CRM), are more likely 

to succeed. 

I believe that on a worldwide basis, the majority of large IT projects have always 

failed to reach their full potential by a significant margin and that this situation is very 

likely to continue. 

Surely, the real problem stems from the fact that the ultimate aim is often difficult to 

set out. This is mainly due to not knowing what the competitive requirement is likely to 

be at various stages in the future and the ineptitude and short-term nature of management 

thinking. However, the ever increasing implementation periods and shortage of 

suitable skills also plays a major part. 

Building a bridge over a major river will seem to most people like a very daunting task 

but in many ways it is considerably more straightforward than a typical large scale IT 

project. In bridge building you know where the opposite shore is and you know that you 

will have to build in a straight line towards it. In IT projects the opposite shoreline is 

often only a faint image and often keeps moving. Then instead of engineers the skill 

shortage often means you have to make do with the equivalent of bricklayers. In the circumstances 

it is not surprising that the IT version of bridge building often produces 

sections going in the wrong direction. 

Questions 

Have you got pleasant memories of implementing the last major system 

Do you welcome the thought of doing it all again 

Do you know the cost, including consultancy, preparing invitations to 

tender (ITTs), installation and implementation of the last project 

Was the cost justified by improved performance 

Do you think changing the systems will enable the functions affected to 

become competitive 

Do you think a new system will justify the cost in performance and 

competitive terms 

How long do you think the new system will enable you to remain 

competitive 

Using management consultants 

Organizations are using management consultants at a greater rate than ever before. For 

the larger established consultancies, at least, the late 1990s represented a period of almost

16 

way that consultants carry out their work. 

Prior to the late 1970s most consultants carried out what is often now referred to as 

theoretical consulting. Depending to a large extent on the function under investigation, 

the consultant would concentrate on understanding what was required of the service and 

then produce a report outlining new and hopefully better ways of doing the work. With 

theoretical consulting the emphasis was on the report and the client was left alone to 

carry out the practical effort necessary to bring about the change. The consultant was 

therefore rarely in a position where blame or criticism was likely to stick. 

These days most consultancy assignments are of a practical nature. The consultant is 

engaged to provide specialist advice and then work with the client’s staff to make the necessary 

changes. 

The gradual movement in emphasis from theoretical to practical consultancy was triggered 

by technology developments. Practical consultancy would have been possible 

without these developments but, in the event, technology provided the spur. The extent 

of the change towards practical consulting can be judged from the fact that many of the 

large consultancies derived from an auditing base now describe themselves in terms that 

emphasize the practical systems development nature of their services. 

Consultants are bound to be better advisers if they have past experience of implementing 

change and, in practical consulting, they are forced to accept responsibility for their 

ideas. This means there can be few clients who would prefer to employ consultants on a 

theoretical basis. 

Nevertheless, there was one advantage in theoretical consultancy that to a large degree 

has been lost. A consultant asked to study a business or a function of a business prior to 

the mid 1970s, did so without the pressure of ready-made software solutions piling up 

daily in front of the team members. Often the theoretical consultant was the only person 

ever to have both the time and inclination to look for an ideal solution since the organization 

was founded. Frequently, the consultant had no idea what the solution was until 

the ‘main findings’ were finally submitted to paper after which the answer often became 

beautifully obvious. The key point here is that the old style consultant could not trust the 

client’s staff to give an accurate analysis of what was required from any given process and 

was therefore forced to get the answer from ‘the customer’. Now many assignments start 

with client and consultant studying the range of ready-made package solutions and conthe 

outsourcing dilemma 

organizations are 

using management 

consultants at a 

greater rate than 

ever before 

continuous boom. Admittedly, work that was directly 

related to Y2K problems tended to fall away in the latter 

half of 1999, but all the indications are that the consultancy 

train has started to pick up speed again. 

The vast majority of consultancy assignments have 

always concentrated on trying to improve a client’s performance 

in a function or group of functions. However, 

there has been a fundamental change over the years in the


sequently many projects end up concentrating on improving 

the current service and neglecting to ask if it is the such shortcuts are 

right service. Such shortcuts are difficult to justify at a time difficult to justify at a 

when so much emphasis is being placed on understanding time when so much 

customer needs. 

emphasis is being 

Clearly, BPR and techniques like strategy consulting ought 

placed on 

to provide the opportunity to discover what is required of the 

understanding 

function. Management consultants might justifiably claim customer needs 

that they would always try to establish the customer needs for 

the foreseeable future if they are given the time and the 

opportunity. On too many occasions, however, the consultants 

start an assignment by accepting the client’s short-list of alternative options. 

No one can doubt that the standard of management consultancy has improved continuously 

over the years, but the number of really satisfied clients does not appear to have 

increased at the same rate. Is it possible, that at a time when continuous improvement is 

essential, management consultants fail their clients because they are not active on the 

client’s behalf on a continuous basis Despite the practical help they provide, could it 

sometimes be dangerous to use such specialists on an irregular basis when the competitive 

marketplace is changing so quickly 

Questions 

Do you believe that employing management consultants in your own 

organization will enable you to become competitive and remain 

competitive for any length of time 

Have you achieved significantly improved performance levels from 

using management consultants in the past 

How effective are performance 

improvement projects 

There cannot be many sizeable organizations that have not subjected some, at least, of 

their core and non-core functions to a range of cost-cutting and performance improvement 

projects over the last 15 years or so. In many cases, two or all three of the elements 

described above – management techniques, packaged systems, management consultants – 

will have been part of the project mix. Certainly, very few projects are completed without 

dipping into scarce resources to purchase the latest hardware and software technology 

available or in fashion.

18 


It is impossible to know how many such projects the originating project sponsor considered 

successful and in any case, that will depend, to some extent, on the targets that 

were originally set and how long the technology chosen remained desirable. Anybody 

studying a large sample of CVs submitted by project managers would naturally surmise 

that all projects are successful and delivered on time and to budget. On the other hand, 

the reports of research companies that check out after implementation projects using 

packaged software, would suggest that results don’t often match expectations. 

It may be that some managers are badly advised, fail to adequately manage the 

project, or just don’t understand what is involved. In many cases, however, a failure to 

improve performance after one of these projects can be directly attributed to a desire 

to avoid the trauma of major change and the resulting redundancies. Too often the 

failures are associated with management reluctance to make difficult decisions. In 

other words the parameters necessary to obtain the desired results were either fudged 

or ignored. 

This problem was illustrated very well during the 1970s craze for centralizing and 

decentralizing. Almost every time a highly decentralised organization approached a management 

consultancy and asked ‘Would we make savings by centralizing’ the consultancy 

proved that it could. However, almost every time a highly centralized organization asked 

if savings were possible from decentralizing, the result again turned out to be positive. 

Management consultancies took a lot of criticism for their role in this matter but much 

of it was unjustified. Usually the client organizations were well aware that the savings 

were resulting from releasing people and processes that were no longer essential to running 

the business, and that they would not have always achieved such savings if major 

relocation issues were not present to provide an excuse. 

Clearly, in a rapidly changing business world the needs of customers must be constantly 

changing. Why then should anyone assume that the way the function or process 

was carried out in, say, 1970 is necessarily still the right way. Obviously, every responsible 

manager will accept this need to adapt, but apparently a significant number of them do 

so ‘half heartedly’. This was apparent in the 1970s when the centralize/decentralize saga 

was in progress and it is clearly still happening today. 

Whatever the causes, it is generally accepted that projects fail too often to meet a reasonable 

amount of the targets set for them. For a number of reasons it will always be 

difficult to label projects as simply successes or failures. For one thing, the parameters for 

judging success and failure are rarely adequately laid down prior to the commencement of 

projects, and for another it is not easy admitting that you have been associated with a failure. 

However, questions aimed at project sponsors such as ‘With hindsight, if you had to 

do it again, what changes would you make’ almost always produce responses that suggest 

at least a degree of failure.


Questions 

How many of the projects that you have been involved with were 

deemed successful 

If the minimum requirement is to reduce costs by 20–30 per cent, 

improve the service and then bring about further savings and 

improvements in subsequent years – how many of your projects would 

be considered successful 

Are you just tinkering with the systems 

When dealing with the problem of competitiveness, all the people writing and lecturing 

on the subject appear to agree on one fact. In a time of accelerating change, they argue, it 

is no good tinkering with existing systems and structures. 

As the rate of change is likely to increase, the universally 

held view now is that any organization seeking to become 

competitive must re-think or re-engineer each business 

process from scratch. 

There are considerable advantages in starting an organization 

from scratch. When in 1945 the allies assisted 

West Germany to rebuild its industries, they took many 

steps that enabled that country to achieve considerable 

competitive advantage. The British Trade Union movement 

played its part in creating West Germany’s 

extraordinary revival by helping to set up a system that 

effectively resulted in only one union operating in each 

the universally held 

view now is that any 

organization seeking 

to become 

competitive must rethink 

or re-engineer 

each business 

process from scratch 

factory. In this way the West German industry had a sensible union structure which 

helped to reduce the number of days lost to strikes and disruptions. By comparison, in 

the decades following World War II, British industry was at a considerable disadvantage 

from ‘demarcation’ and other disputes that were exacerbated by having multiples of 

unions operating in the same workplace. 

Why did the British Trade Union movement not adopt the policy it recommended to 

West Germany The obvious answer is that the British union bosses had their empires to 

protect. Why does management often fail to take difficult decisions during performance 

improvement projects Clearly the protection of empires is a major factor. 

Starting from scratch is easy if your organization is virtually destroyed by war and reasonably 

straightforward if a major relocation or reorganization due to acquisitions or 

mergers is involved. Otherwise it seems most managers are not mentally strong enough or 

far sighted enough to carry out the changes necessary to put their organizations on a truly

20 


competitive footing. It is certainly true to say that fear of failure and other reasons have 

prevented many managers aiming for targets that they might reasonably have been 

expected to achieve. 

Becoming ‘world class’ 

Many writers on management issues argue that for a business to grow significantly, it you 

must aspire to become ‘world class’. But to succeed in this way it has to achieve world 

class status in most of the processes it carries out in the normal course of business. 

Here lies one of the major problems in trying to remain competitive in the twentyfirst 

century. For non-core functions such as IT and finance to remain competitive in 

most business situations, costs will need to be reduced and service improved on a regular 

basis. For most organizations this will mean, at the very best, fewer key roles for the relevant 

executives. In turn this is likely to mean that the really capable executives will seek 

employers that can offer growth in their specialist area. 

So how can an organization remain competitive in all or most of its functions or business 

processes Regular re-engineering will probably be out of the question, when 

considering the management time involved. Admittedly, the redesign stage of BPR can be 

completed in just a few days when done for a second or third time, but new implementations 

often take as long as the original. In any case, it is unlikely that any amount of 

re-engineering will transfer non-core functions into the sort of departments that will 

attract the best people. 

Questions 

Are you sure that you are not trying to improve the sword, when your 

competitors are currently using tanks and working on the development 

of laser guided weapons 

Why assume that competitors will obtain 

ongoing world class status 

At this stage, this is a very fair question. A reasonable summary of the statements made so 

far in Chapter 2, might be as follows. 

● 

● 

There will continue to be developments in technology, probably at a gradually 

increasing rate. 

From now on all heads of functions will need to ensure that their performance levels 

are maintained at a level that keeps them competitive. This means that the service 

provided must be continually improved and the costs stabilized or reduced.


● 

● 

● 

● 

Benchmarking and, perhaps, other techniques will be developed to highlight good 

and poor performances within months of them occurring. 

A range of management techniques, software systems and consultants with their 

methodologies are on hand to provide salvation. 

Sadly, a significant number of projects set up to achieve this salvation fail to meet the 

main targets set for them. Failure can result from a variety of reasons, but quite often 

it happens because management backs away from taking difficult decisions. There is 

no sign that management is improving in this respect. 

Even where a project has been successful, it does not mean that the improvement or 

newly found competitiveness will automatically last for a significant amount of time. 

It would be difficult to argue with the above summary but some managers studying it 

might nevertheless come to the following conclusions. 

● 

● 

● 

● 

‘A negative benchmarking report would be damaging, but there is only so much I 

can do to change and improve the existing structure.’ 

‘If so many performance improvement projects fail, why should I assume that any of 

our competitors are going to achieve this, so called, world class’ 

‘Even if a competitor should achieve world class status, how long will they be able to 

keep it’ 

‘Why should we be concerned by these developments’ 

The reason for concern 

The reason why managers must now strive to be competitive 

in everything is quite simple. In recent times it has 

been proved that if the circumstances are right, it is possible 

to obtain substantial service improvements and cost 

savings from both core and non-core functions by involving 

external specialists on a continuous basis. Furthermore, 

it is possible to take action that will enable an organization 

to obtain even greater improvements and savings in the 

years ahead whilst passing much of the worry and responsibility 

to a third party. 

In June 1995 an article appeared in the Harvard 

Business Review in which the Head of IT at BP Exploration 

claimed that by outsourcing almost all his IT function to 

it is possible to obtain 

substantial service 

improvements and 

cost savings from 

both core and noncore 

functions by 

involving external 

specialists on a 

continuous basis

22 


specialist IT companies, he had achieved considerable benefits. Amongst the benefits 

claimed was a much improved service, a 30–40 per cent reduction in costs and a guarantee 

of further improvements and savings in the future. Later the Finance Director of BP 

Exploration went into print to say that he had just completed a four year contract for the 

outsourcing of his finance function and had signed a further five year contract with the 

same service provider. He went on to say that over the nine years of the two contracts, BP 

Explorations business will have grown by 50 per cent, although his costs will have 

reduced by 50 per cent and yet he now has a far better service. 

Ever since the 1989 decision by Eastman Kodak to outsource most of its IT operations 

there has been a gradual increase in articles and PR releases which appear to indicate that 

a level of service improvements and cost savings might be possible from outsourcing that 

would be very difficult to obtain from an internal service. The BP Exploration articles 

added further weight to the outsourcing argument by suggesting that continuous 

improvements to the service were also a realistic target for some client organizations. After 

the first of these articles, there was a very noticeable decline in the number of managers 

claiming that outsourcing a function like IT was simply an admission of failure. 

Certainly, BP Exploration’s competitors were left in no doubt that to get back on a 

competitive footing regarding IT and finance, they had to look for equally innovative 

solutions. Recently, a number of these competitors have done just that. In most cases the 

dominant factor has been the involvement of external specialists in both IT and finance. 

Apart from BP Exploration there are many other examples of both client and service 

provider jointly claiming dramatic success from an outsourcing arrangement. The logic of 

outsourcing a non-core function to an external specialist in a relevant field has to be theoretically 

sound. Why should an organization insist on employing the members of its 

non-core finance function when it has long ago outsourced functions like Security, 

Catering and Cleaning and would no longer even consider taking them back inhouse 

Given its proven potential, it is now clearly illogical to embark on a major performance 

improvement project without including outsourcing as one of the main options. 

The prospect that competitors could achieve continuous improvements and savings by 

taking such action is perhaps the key cause for concern when considering the entire subject 

of competitiveness. Clearly, not all the competition will take the action necessary to 

maximize competitiveness but most organizations would be in difficulty even if only a 

small percentage of their competitors obtained such an advantage. 

But does this mean that all organizations should outsource their non-core functions Are 

dramatic savings and service improvements open to all Is outsourcing always the answer 

The short answer to this last question is No! Outsourcing does not always work, in 

fact there are many examples of abject failure. Indeed, the failure rate may be even greater 

than is normally experienced for internal projects. Nevertheless, the potential rewards are 

such that failure to consider the outsourcing option is no longer just a management misdemeanour, 

it’s a very serious crime. Consider this: if you succeed with an internal


project, how long will it be before a further project will be necessary – six months, a year 

or two years If you successfully outsource to a provider who is motivated and skilful 

enough to make continuous improvements, then you will have to be careful in managing 

the relationship, but you can do so in the knowledge that the very best efforts are being 

made on your behalf for many years ahead. 

Contrary to one common theory, outsourcing is not just 

something that only major prestigious organizations can 

benefit from. Many major client organizations have been 

very unsuccessful in their efforts to outsource, whereas some 

small organizations with as few as five employees have been 

very successful in outsourcing functions. 

It is distinctly possible for most client organizations, 

large and small, to gain great benefit from outsourcing at 

least some of their non-core functions. In order to do so 

they will need to work hard at understanding what is possible 

and it may be necessary for them to seek out or create 

the ideal providers. 

contrary to one 

common theory, 

outsourcing is not 

just something that 

only major 

prestigious 

organizations can 

benefit from 

In order to understand how this could be done and to illustrate why some deals succeed 

and some fail, it is necessary to examine the various issues, trends, successes, risks 

and failures taking place in the market. This is attempted in the following chapters.

chapter 

3 

the outsourcing alternative 

Outsourcing defined 27 

Outsourcing terms 27 

The development of outsourcing 29 

Getting good performance 

from a service provider 32 

Conclusion 33

the outsourcing alternative 27 

Outsourcing defined 

The most complete definition of the outsourcing concept that I know of is: 

‘… the transferring of an internal business function or functions, plus any associated 

assets, to an external supplier or service provider who offers a defined service for a 

specified period of time, at an agreed but probably qualified price’. 

It must be understood that the control of the functions in 

question will thus reside with the service provider. This 

outside organization, as a specialist in its field, will usually 

be in a position to add value not normally obtainable in a 

non-core function retained in house. 

Outsourcing has now become a familiar idea to the 

business and associated media world. However, it is often 

used as an umbrella term for a variety of different arrangements, 

not all of which involve adding value or the 

permanent transfer of personnel. These arrangements may 

be better defined by the following terms. 

outsourcing has now 

become a familiar 

idea to the business 

and associated 

media world 

Outsourcing terms 

Facilities management 

The term ‘facilities management’ (FM) is sometimes used interchangeably with the term 

‘outsourcing’. However, whereas outsourcing is associated with adding value, an FM 

agreement simply transfers responsibility for the management of existing staff, property 

and equipment. For example, where an organization wishes to transfer just that part of its 

IT function that deals with established or legacy systems, including all staff, hardware, 

systems software and communications involved in the day-to-day running of the function, 

a conventional FM agreement should suffice. However, if it also wishes to transfer 

the development of applications systems and the applications staff, then it would be more 

correct to describe the arrangement as an outsourcing agreement, because it would 

include an element of added value.

28 


Full or total outsourcing 

This term is used to indicate that the staff and, possibly, assets relating to the whole of a 

major business area (in practice about 90 per cent of it), such as IT or finance, will be 

transferred to the service provider for the period of the contract. 

Part or selective outsourcing 

Under this sort of agreement, a significant part of the function will be retained in house. 

Co-sourcing 

Co-sourcing was originally devised by EDS to describe its own version of partnership 

outsourcing. In recent times, however, some people have used the term to describe outsourcing 

arrangements involving multiple providers. 

Transitional outsourcing 

This occurs when an organization transfers control of its legacy systems/platforms to a 

third party in the belief that its own internal IT staff have the abilities necessary for the 

development of new systems. Any organization becoming involved in transitional outsourcing 

would be demonstrating an unusually high level of confidence in the 

development capabilities of internal IT staff. 

Transformational outsourcing 

In the opposite of transitional outsourcing, an organization brings in a service provider to 

completely re-engineer the work of the function, probably developing new systems and 

building up a reliable skill base for the client to take over. Transformational outsourcing differs 

from full outsourcing only in that the transfer of people and assets is not permanent – 

at the end of the project the client regains full control and responsibility. To many people 

this sounds like a straight consultancy assignment. The difference is that in transformational 

outsourcing the provider normally works quite independently from the client’s staff. Not 

surprisingly, perhaps, there are few real examples of transformational outsourcing. 

Joint venture outsourcing 

A joint venture agreement involves setting up a new company to exploit a perceived business 

opportunity. The client’s staff and assets will then be transferred to this joint venture 

company, rather than to the service provider. The aim will be not only to improve the 

transferred service but also and, perhaps, more importantly, to develop products and services 

that can be sold to third parties. Client and service provider will then share the


profits from the new company. Thus the service provider can fully exploit its systems 

development potential, with the client sharing the development costs of new software 

products. At the same time, the joint venture benefits from the client’s specialized knowledge 

of their marketplace. Some joint venture products and services have been developed 

over time from opportunities that have arisen out of full outsourcing arrangements 

already in place. 

Equity stakes 

Some outsourcing relationships have been strengthened by 

either the client or the provider taking an equity stake in 

the other. Where it is the provider taking this step, it may 

be seen as a demonstration of their commitment to the 

best interests of their client. Where it is the client taking 

the equity stake in the provider on the other hand, it is 

often seen as a form of security. This was the assumption 

made by the outsourcing market at large when Swiss Bank 

signed an outsourcing deal with a provider, Perot Systems, 

taking a 24 per cent stake in Perot. However, the deal also 

demonstrated that the bank must have been impressed by 

some outsourcing 

relationships have 

been strengthened 

by either the client 

or the provider 

taking an equity 

stake in the other 

what Perot had to offer. A similar event occurred in September 1997 when the 

Commonwealth Bank and EDS Australia signed what was then claimed to be the world’s 

largest financial services outsourcing IT contract. The deal was worth $5 billion over ten 

years and involved the Commonwealth Bank taking a $240 million, 35 per cent share in 

EDS Australia. 

The development of outsourcing 

In the 1990s, some management theorists argued that the 

important factor in maintaining competitiveness was differentiating 

between core and non-core functions and 

then transferring all non-core functions to a specialist in 

that function. This was not a particularly new idea but it 

was certainly one ‘whose time had come’. As discussions 

on the subject increased and evolved, the concept of the 

virtual organization was born. The theory behind the virtual 

organization is that any function that is not core 

should be transferred to an external specialist in that function. 

In addition, however, it argues that there are bound 

the theory behind the 

virtual organization is 

that any function that 

is not core should be 

transferred to an 

external specialist in 

that function

30 


to be organizations that will perform your core functions better than you do – so why not 

transfer those as well A number of organizations have recently been created on this principle, 

i.e. all, or almost all, the functions have been outsourced from day one – leaving 

behind only the ‘soul’ of the business. It is too soon to come to any conclusion as to the 

rights and wrongs of starting an enterprise this way. Nevertheless, it will be interesting to 

see what happens to them over the medium and long term. 

It is now generally accepted that however a function or group of business processes is 

structured or managed, improvements done on a one-off basis are, at best, fire-fighting exercises. 

The ideal solution would involve putting each individual function or group of 

processes in a position where it is able to take up new technology developments when they 

first appear and to seek out continuous improvements, in order to remain competitive. 

It is possible to lay down the necessary requirements for the function head to be able 

to achieve this aim. 

● 

● 

● 

The function should, ideally, be core. 

The function should be capable of continuous growth in order to attract the best 

quality workers. 

The function should be in a position to grow by taking on additional clients. 

There is a strong argument for saying that if management cannot make a case for the 

continuous growth of a function then they should strongly consider one or more of the 

externalization options. 

The virtual organization concept may be very new, but externalizing functions to outside 

specialists has been practised for many years under various names: contract 

manufacturing, facilities management, outsourcing and insourcing. For example, many 

major firms of accountants will freely admit that even at the beginning of the twentieth 

century they had clients for whom they did the ‘books’ rather than the audit, and this situation 

remains true today. 

With hindsight ‘externalizing’ might have been a better name than ‘outsourcing’ to 

describe the range of business activities that have grown up on the basic business idea that 

if your organization does not specialize in a particular function, then it will probably be 

beneficial in terms of cost and quality of service to transfer the control of the function to 

a specialist organization. 

Contract manufacturers and people involved in the facilities management business will 

generally agree that they are in an outsourcing business. However, when most people hear 

or see the word outsourcing they normally think of IT outsourcing. 

The outsourcing of IT functions started to happen on a major scale because of the 

high cost of processing power in the 1970s. This situation forced even major organizations 

to get at least some of their computer solutions from computer bureaux. The 

realization that the enormous expense that they might only recently have incurred on


hardware was not going to keep them competitive for very long was a defining factor in 

the move towards outsourcing. 

Knowing that they had to maintain existing systems, yet invest further in the hardware, 

software and specialists necessary to move into expensive replacement systems 

concentrated the corporate mind. Senior management began to worry that their IT 

departments were taking an ever increasing share of time and resources and yet were not 

part of their core business. Given these circumstances, clients who had either cash flow 

problems, exceptionally poor systems, were suffering strong competition or who needed 

to relocate, initially dominated the outsourcing of IT. 

The outsourcing boom was therefore born on the back 

of the IT area and the unique circumstances experienced 

in IT during the latter part of the twentieth century. 

In those early days of outsourcing, the clients and their 

IT service providers would both anticipate that a specialist 

in IT would be able to provide at least a comparable level 

of service to that which existed before the transfer. Equally 

the outsourcing boom 

was born on the back 

of the IT area 

they would expect that the service provider could do this profitably whilst producing a 

saving for the client. Nevertheless, it is doubtful if too many people at the time could 

imagine the potential savings from an outsourcing arrangement. 

The typical service provider will try to ensure that by the end of the transition, i.e. 

when the relevant staff are finally transferred to the service provider’s employment, all the 

initial changes deemed necessary to the system have been completed. The cost of providing 

the service from that point on is always going to be an unknown until it finally takes 

place. It is interesting to note, however, that most providers initially estimated that the 

likely savings would be something under 20 per cent, but gradually began to realize that 

even when apparently efficient IT departments were being transferred, the figure could 

reach 40 per cent or more. Obviously this figure will be shared in some way by both 

client and service provider. 

When the outsourcing of finance departments first became a reality, new, would-be, 

service providers imagined that the total saving might be in the order of 15–20 per cent. 

Although actual results have varied enormously, total savings of 40 per cent have been 

achieved with this function also. 

Many of the early outsourcing deals were disasters for one and sometimes both parties, and 

for a while it appeared that the lawyers were always going to be the greatest beneficiaries. 

However, when the successful deals started to get publicity, it became apparent that 

there was a significant savings factor to be shared by both parties, if an efficient specialist 

service provider was involved and sufficiently motivated. Once this situation was understood, 

it became clear that outsourcing could not be ignored. How could it be, when 

articles appeared, endorsed by both parties to an outsourcing, which indicated it was possible 

for a client organization to obtain both an improved service and cost savings

32 


the important factor 

that cannot be 

ignored is that all 

functions are now 

being outsourced and 

the rate at which new 

contracts are being 

created is increasing 

all the time 

immediately after the transition and then look forward to further service improvements 

and savings in the future. 

Consequently, outsourcing became a dominant feature of business in the 1990s with functions 

other than IT being outsourced. As the globalization of business increased and the 

World Wide Web began to evolve, the growth rate of all the 

externalization to outside specialist industries such as outsourcing 

and contract manufacturing took off at similar rates. 

The important factor that cannot be ignored is that all 

functions are now being outsourced and the rate at which 

new contracts are being created is increasing all the time. 

However, it is important to understand the various reasons 

why this growth is taking place. Certainly, there are still 

many clients signing outsourcing deals for the very reasons 

that started the modern boom in IT outsourcing. In other 

words, they have cash flow problems, need to relocate, or recognize 

that they have very poor, non-competitive systems. 

A significant number of others have approached the 

situation from a very different angle. They have accepted 

the evidence put forward by a number of satisfied clients 

and their providers and reasoned that the service improvements, savings and, above all, 

continuous improvements claimed could only have been achieved by using external specialists. 

They have, therefore, approached the outsourcing concept with added value in 

mind and did so even where the relevant managers believed that they were already competitive 

with the functions concerned. 

Getting good performance from a service provider 

It will be obvious, though, that to get the sort of performance from a service provider that 

BP Exploration claimed, the following factors must be in place: 

● 

● 

● 

● 

● 

the provider should be an established specialist in the function; 

the provider should be a ‘Mecca’ for top quality staff; 

careful consideration must be given to the location of the service facility and to the 

treatment of all staff; 

the client will need to be an important customer; 

the provider must be highly motivated to make continuous improvements. 

If the provider is also a consultancy or even associated with a consultancy, or has other 

clients, the motivation will have to be strong enough to limit the degree to which key


personnel are moved to other projects. Some movement of the provider’s staff around the 

client base will be desirable but even a slight fall off in motivation, such as might happen 

if the provider strikes an even better deal with another client, could be very damaging. 

Motivating the provider 

In order to motivate a specialist service provider there will need to be some inducement 

that runs until the end of the contract. In addition there will need to be a firm indication 

that a further contract, at least as lucrative as the first one, is available for a job well done. 

At a minimum this will involve a risk/reward sharing arrangement whereby, beyond a certain 

level, the two parties share further savings or losses in some pre-agreed way. These 

partnership or value-added arrangements make up the bulk of the so-called win/win 

deals. Increasingly, the emphasis will be more concerned with continuous improvements 

to the service rather than just cost savings. A good example of this is the deal by which 

Rolls Royce Aero-Engines outsourced virtually all of its IT department to EDS. The key 

factor in this arrangement being the EDS pledge to keep Rolls Royce ahead of its competitors 

in the IT function. 

It has often been relatively easy for the client organization to set out its terms. 

Typically, a minimum service is laid down, which will naturally be superior to what they 

are experiencing at the time. Then the maximum price is stipulated. Where a partnership 

arrangement is in prospect it would be normal for the client to look for a stable price over 

a four or five year contract that was no more and very likely less than their current costs. 

Once these two issues have been mulled over by the client organization’s management, 

they will, initially at least, claim to be happy to share any further savings the service 

provider might achieve on a 50/50 basis. 

It is certainly true that most current outsourcing success stories are based on 

risk/reward sharing deals between client and service provider. It would be equally true to 

say that the enormous growth of modern outsourcing is largely based on such arrangements. 

However, a number of the providers credited with producing top quality 

performances for their clients have apparently performed badly for other risk/reward sharing 

clients of roughly the same size and importance. I hope some of the reasons for this 

situation will become clear in the later stages of this book. 

Conclusion 

Using the sword and gun analogy referred to earlier, it is reasonable to picture the conventional 

non-core internal function as the sword department. It has been around a long 

time and it is under growing pressure from those that argue that it is out of date because 

it confuses the importance of key processes. In addition, further attempts to improve performance 

do not appear to justify the collective effort made.

34 


Against that the concept of externalizing to a specialist provider could be likened to 

the gun – it is a relatively new idea and is capable of continuous improvements. Why 

then should anyone persist with the sword when they could have the latest high tech gun 

One very good reason is that you might get the outsourcing version of a gun that is 

difficult to understand, where there is no manual and the help desk has continuous routing 

problems. In such circumstances it would be unpleasant to see your competitor 

approaching with a sword. 

Nevertheless, the gun now exists, therefore you need to consider future options 

very carefully.

chapter 

4 

reasons for outsourcing the 

various business functions 

IT outsourcing 37 

Business process outsourcing 41 

Facilities management 49 

Outsourcing from inside the industry 50 

Contract manufacturing 52 

Insourcing 53 

Software maintenance support 54 

Outsourcing marketing functions 55

easons for outsourcing the various business functions 37 

IT outsourcing 

Perhaps the single most important reason for outsourcing IT 

is the chronic and almost continuous shortage of suitably 

skilled staff. Organizations based in or near major centres of 

population like London often feel that they are at the greatest 

risk of losing key staff because the best people will always 

want to work in the glamorous areas such as financial investment 

or the media and major centres of population provide 

the opportunity to pick and choose from a vast range of 

employers. Whilst accepting that organizations without an 

exciting image will probably be disadvantaged in this way, the 

fact is that the shortage is global – even the glamour organizations 

have IT recruitment problems. 

perhaps the single 

most important reason 

for outsourcing IT is 

the chronic and 

almost continuous 

shortage of suitably 

skilled staff 

Despite the mid 1990s speculation that the start of the new century would see, for the 

first time, widespread unemployment in the ranks of IT specialists, the shortage is likely 

to be continuous for some time to come. Without doubt, newly IT trained personnel are 

coming off the University and college production lines in ever increasing numbers in 

most countries, and this will clearly ease problems for many organizations if they are content 

to concentrate on existing technology. However, the problem in maintaining 

competitiveness is that if an organization is to keep abreast of its competition it must be 

using the most up-to-date technology and be prepared and able to cope with future 

developments. Simply having IT specialists is only part of the answer if they not being 

trained in relevant new developments. 

A few people believe that the pressure to outsource IT will largely disappear over the 

next year or so. In Western Europe the amount spent on in-house IT and accounting 

functions is broadly similar – between 1.5 per cent and 4 per cent of turnover for the 

average company. As time goes by, most observers anticipate that IT expense will increase 

rather more quickly than that for finance. However, the fact that they are currently 

reasonably in line suggests to some optimistic individuals that IT costs may have stabilized 

and that further outsourcing of the function is not necessary. 

On first investigation, the internal IT department looks like a sound concept. The 

organization can employ its own specialists in the quantity and quality it requires and 

these people will be available to carry out the specific tasks that are necessary each and

38 


every working day. Sadly, for most organizations this ideal concept is flawed due to the 

skills shortage and the accelerating changes brought on by new technology. Each organization 

needs to avail itself of the best service that information technology can offer. But 

the individuals with the skills necessary to bring about the very best service want to be 

involved with specialist organizations that can offer exciting work and the opportunity for 

personal development. 

One ever present ‘nightmare scenario’ for many IT Directors is the need to take on 

new technology at a time when the ongoing workload is at stressful levels which effectively 

rule out or limit the chance of widespread re-training. If, as usually happens, 

some of the staff decide to move on during this period, then the nightmare becomes 

even more frightening. 

The areas where the shortage of qualified IT specialists is now most acute include call 

centre design, ERP, internet development and data warehousing, all areas that have 

appeared on the scene relatively recently. The only thing we know about the future is that 

new specializations and applications are likely to appear at an accelerated rate. Therefore, 

there may always be a skills shortage relating to the newest developments. 

The IT function is now clearly becoming increasingly important for all organizations 

and for a growing number of them more and more difficult to understand and 

use. The need to reduce costs, deliver faster cycle times and generally improve the service 

is going to become increasingly difficult to reconcile when considered against the 

needs of core activities. 

Most sizeable organizations in the Western world now have a target saving of 30 per 

cent in mind when they begin to consider outsourcing IT. If they could achieve such a 

saving whilst obtaining a comparable or better service, then logically their management 

would find it difficult to argue against outsourcing, particularly if they believed that they 

were ‘getting rid of a problem’. 

One reason why there is not an automatic rush to outsource IT departments is that 

so many deals go wrong. It is variously estimated that 20–35 per cent of IT outsourcing 

arrangements are cancelled or not renewed when the contract is completed. I accept 

there are reasons why a contract may not be renewed other than client dissatisfaction 

with the service provider. Nevertheless, a significant number of IT outsourcing arrangements 

fall far short of keeping the client satisfied and competitive. This is the main 

reason for caution and improving overall understanding 

when contemplating such a venture. 

one reason why there 

is not an automatic 

rush to outsource IT 

departments is that so 

many deals go wrong 

Another reason for caution is the fact that the outsourcing 

service providers, large and small, all find it 

difficult to find sufficient quality staff to meet their needs. 

Being IT specialists they will find it easier to recruit good 

people than their clients, because they offer increased promotion 

prospects, but they are probably growing much


more quickly than other organizations which will act as a balancing factor. It may appear 

comforting that the service provider has hundreds or thousands of specialist staff on the 

payroll, but that does not mean that all or any of these people can be switched to your 

project at a moment’s notice. 

Consequently, the client organization should take careful note of how many of its own 

IT staff will stay with the provider after the transition. If the provider has to replace most 

of the team early in the arrangement, then there is cause for some concern. It is worth 

talking to the provider’s last client and asking how frequently short-term contractors are 

moving in and out of the project. To be fair, though, some providers have done a good 

job in achieving a smooth transition and successfully implementing new systems on time 

even when they were unable to add as many specialists to the project as originally thought 

necessary. It would also be fair to add that if unforeseen problems do occur during the 

transition or at a later date during the contract, the typical IT service provider will logically 

have a better chance of overcoming them than the client would on its own. 

An organization considering outsourcing a non-core IT function must look very carefully 

at what it might be giving away. Some organizations have retained the senior 10 to 

15 per cent of staff in house and still found that they have handed over skills to the service 

provider which are key to its future wellbeing. If this happens then it will be very 

important to have set up a good relationship with the provider. Although losing valuable 

skills in this way does sometimes occur, this is not the same as sharing skills. It would be 

surprising if the provider’s staff did not learn something new from working with the 

client organization, but that is not normally a problem because on the plus side each 

client will benefit from the ideas the provider has picked up from other clients. 

Management differs strongly regarding potential loss of knowledge or skills. There are 

managers who fret about the use of contractors or consultants for fear that they could 

pick up information that will be given to other organizations and so damage the competitive 

situation. Other managers appear to believe that any knowledge or skills advantage 

they have is likely to be fleeting and therefore not worth trying to protect. However, the 

vast majority will recognize the need to be prudent with the organization’s intellectual 

capital whilst accepting that there has to be some give and take. 

The number of organizations which have suffered serious knowledge and skills losses 

from outsourcing IT must be relatively small. It would normally only occur where key 

individuals left the client but refused to join the provider, or the loss occurred somewhere 

in the system during the transition, i.e. as sometimes happens with lost legacy systems 

which are later found to be important. 

In the past, organizations tended to outsource IT without considering loss of knowledge 

and skills as a serious problem – it was after all a non-core function and the desire or 

need to outsource was often an admission that there was not much at risk. If that was 

ever really true for the majority of organizations, there must be some doubt that it is still 

true today and serious doubt that it will be true tomorrow.

40 


If the various business functions are pictured as branches on a tree, then when IT outsourcing 

got underway in the 1970s and 1980s, the IT branch was a relatively thin but 

quick growing limb. Even then, its enabling qualities had resulted in small shoots going 

out to other branches and giving the tree a lop-sided appearance. Since then the branch 

has become very strong, it is firmly attached to most of the other branches and entwines 

the trunk. In effect the IT branch could be likened to a parasite ivy plant apparently 

intent on strangling a giant oak. The ivy has a different agenda from the oak tree and the 

oak might be better off without it. 

Is it possible that the typical IT department is strangling 

is it possible that the 

typical IT department 

is strangling the 

organization and 

confusing its need to 

concentrate on core 

functions 

the organization and confusing its need to concentrate on 

core functions Let’s face it, functions like finance and HR 

would probably not be candidates for outsourcing if technology 

played no part in their operation. 

All the various ways in which IT permeates an organization 

and the growing trend to integrate all the functions 

by the use of enterprise resource planning (ERP) systems 

does not mean that IT has become a core function but it 

might be even more difficult in time to outsource than a 

core function. In the past, management gurus have likened 

the chief executive or the board of directors to the business 

equivalent of the human brain. Few business brains could function without IT in today’s 

competitive market and so any operation to remove and outsource these key links to the 

brain must be thought out very carefully. This does not mean that you cannot improve 

the brain’s capability by outsourcing, but the subject is worthy of deep thought. 

The usual reaction to the fear of outsourcing part of the organization’s grey matter is 

to bring in the strategic argument. It sounds simple ‘Keep the strategic technology in 

house and outsource the rest’. But what is strategic in IT terms It’s unlikely to be the 

most expensive hardware purchased because that’s probably the mainframe ‘rusting’ in 

the shed. Is it the most recent hardware purchased, or the software systems currently in 

use or the combined skills and knowledge of the IT team The strategic IT argument will 

be valid for many organizations but for others it is meaningless. Obviously it is possible 

to outsource parts of IT that are clearly defined entities such as legacy systems, desk top 

support, applications development, etc. However, as previously stated, IT has spread its 

tentacles right through the organization, therefore in many situations it would be difficult 

for anyone to separate the strategic elements. 

In any case, why should all organizations want to outsource everything but the strategic 

element Those organizations that outsource for the original negative reasons, i.e. 

poor systems, cash flow problems, etc. must anticipate getting an improved service from 

the outsourcing service provider. Why then separate what they consider to be the strategic 

systems and prevent them getting a better service


I appreciate I have been making arguments both in favour and against outsourcing in 

the above paragraphs. But in all IT outsourcing situations there are arguments for and 

against. For most organizations the IT function continues to offer the greatest benefits 

from outsourcing, but also the greatest risk. With this function more than any other, the 

client needs to be confident that the service provider will strive to improve the service 

throughout the length of the contract. A risk/reward sharing partnership will go some 

way towards achieving this aim, but short of owning part of the provider’s equity, how 

can the client guarantee it 

Business process outsourcing 

Within the outsourcing industry, the term business process outsourcing (BPO) is used to 

describe the outsourcing of a varying mix of non-core processes. Typically this mix will 

include finance and accounting, HR, procurement, payroll, internal audit, taxation work, 

customer support centres and a range of industry specific processes. To some people BPO 

will also include applications processing. However, I prefer the definition given by 

Dataquest, an American IT research company. Dataquest looks at BPO as information 

technology enabled business processes, i.e. those processes that are IT intensive and/or 

should be IT intensive and can be transformed by the application of information technology. 

Since almost every business process is at least supported to some degree by 

information technology, this definition leaves a lot of grey areas. But basically the 

Dataquest definition would not include catering services; gardening services, etc. because 

they require little or no need for IT. On the other hand they see application outsourcing 

as IT outsourcing because typically it is the management of that application that is 

involved. Onsite or remote, Dataquest argues, it is an application management function 

and is therefore part of IT. 

However the definition is drawn, it is clear that a significant proportion of major 

organizations in the developed world have now outsourced a large number of these 

processes. What is less clear is the degree of success achieved. 

In 1998 PricewaterhouseCoopers commissioned Yankelovich Partners to carry out a 

global study on BPO. This study covered 304 top decision making executives in 14 countries. 

After confirming that global competition was the main driving force for indulging 

in BPO, 63 per cent agreed that they had outsourced one or more of the processes concerned. 

Of those that had outsourced, a very positive 84 per cent claimed to be satisfied 

with the performance of their service provider. 

Few industry insiders will be unduly surprised by the above satisfaction claims. Payroll 

is the most widely outsourced administrative process, it was one of the first areas to be 

outsourced and 97 per cent satisfaction levels have been recorded for payroll outsourcing 

alone in the recent past.

42 


With the possible exception of finance and accounting, all the other business processes 

are less dependent on state of the art technology being used in the outsourcing than the 

IT function itself would be. Perhaps it would be more correct to say that the absence of 

the latest technology is not so transparent in some of these processes. For example, a 

CEO or FD may be more than happy to see that payroll costs are on a gradually reducing 

scale, without realizing that even greater savings might have been possible if the service 

provider had utilized the latest technology improvements. The client not being aware of 

the technology improvements being made also means that over time the provider could 

be passing on a declining proportion of the savings being made. 

Nevertheless, few would deny that there is reasonable level of satisfaction amongst 

most client organizations that have outsourced business processes. This also appears to be 

true even where savings of under 10 per cent are the norm and where credible service 

providers are more thin on the ground than in the IT market. 

Despite this reasonable level of satisfaction, the growth 

in BPO always seems to lag behind the forecasts made. On 

despite this 

reasonable level of 

satisfaction, the 

growth in BPO 

always seems to lag 

behind the 

forecasts made 

a global basis, government departments have been responsible 

for a significant amount of BPO, but this has never 

been copied to the same extent by the private sector. Some 

of the main service providers are handling what are very 

similar and essentially simple processes for a wide range of 

public sector clients in many countries around the world. 

In many cases the providers are dealing with these 

processes in more or less the same way that their clients 

did. They might have improved the service since taking it 

over but they are still concentrating on making the service 

fit in with related services for the client concerned. At some point these service providers 

will need to independently design process specific ways of doing the work and then set 

about convincing their clients of the advantages. Admittedly, it will be more difficult to 

do this for some processes than it is with, say, payroll, but it may be essential before major 

expansion in the private sector can be achieved. In time I would expect a number of service 

providers to offer niche services on a package basis within the BPO marketplace. 

Any client organization contemplating outsourcing one or more business processes 

would be well advised to build in safeguards from day one. This will include benchmarking 

the current service and doing it in such a way that the in and out of scope boundaries are 

clearly defined. The various appendices to this book outline the safeguards that should be 

taken when dealing with the service providers and include arguments for and against going 

with a sole provider or creating a competition. This latter point is particularly important in 

BPO because many arrangements start with the client talking to one provider about one 

function and end many months later in an agreement with that provider to take over a 

range of functions on an integrated basis. The client management may have been willing to


work on a sole provider basis for the original amount of work but would have instinctively 

tried to create a competition if they had only realized just how much was eventually going 

to be outsourced to one provider. It is natural that as the talks develop the service provider 

will explain how the client’s competitive position can be improved by including more 

processes in the mix. Obviously, the client organization is not going to outsource if it is not 

going to benefit. However, the question remains – would they have increased the benefits 

obtained in the outsourcing if they had created a competition 

It has sometimes been argued that as the various elements making up BPO are not so 

technology dependent as IT, then the need to outsource these areas will decline when the 

overall economy goes off the boil. It would be surprising if this were true. Outsourcing 

has increased all over the world during both periods of economic expansion and decline. 

Clearly, most outsourcing to date has involved IT and it is easier to imagine why IT 

would appear as a candidate for externalization in periods of both growth and decline. 

Nevertheless, BPO has taken place all through the relatively high growth period of the 

late 1990s. As the cost savings issue is likely to come to the fore in periods of economic 

decline, BPO will presumably continue to be practised. 

None of this quite explains why BPO always seems to grow less quickly than most 

observers anticipate. Perhaps the real reason for this is that many senior managers instinctively 

realize that until the future of their IT is really on a sound footing then outsourcing a 

significant number of BPO operations is tantamount to putting the cart before the horse. 

It is worth looking at some of the functions included in BPO in more detail. 

Finance outsourcing 

One statistic that appears quite frequently in the trade press is that about 50 per cent of 

sizeable UK organizations have outsourced a significant part of their IT. We are also led 

to believe that in the average organization, IT and finance account for similar levels of 

expenditure. Therefore, if outsourcing was always carried out on the purely strategic basis 

of externalizing non-core functions; it would be reasonable to expect finance to be outsourced 

as often as IT. 

In recent times a significant number of multinationals, including BP, Shell, National 

Starch & Chemical, Sears, NFC, Conoco, Lasmo and a range of public sector organizations 

have outsourced finance and accounting. There are many more in the pipeline and a 

number of SMEs have recently found suitable providers – often with IT and finance 

going as a package in one contract. Nevertheless, it is extremely unlikely that finance and 

accounting will ever be outsourced as frequently as IT. Most informed guestimates see a 

maximum of 15 per cent of all organizations outsourcing finance by 2005. 

There are many reasons for believing that finance outsourcing will always lag behind 

IT outsourcing. Some of these reasons are obvious and some less obvious. Many organizations 

find it almost impossible to recruit top quality IT staff because their systems are

44 


there are many 

reasons for believing 

that finance 

outsourcing will 

always lag behind IT 

outsourcing 

old and ‘uninteresting’, they cannot afford competitive 

salaries and promotion prospects are limited or non existent. 

It is difficult to imagine a direct comparison with 

finance, although clearly ‘high flying’ accountants are 

more likely to be attracted to organizations experiencing 

high growth, etc. 

The factors leading to the growth of finance outsourcing 

are summarized below. 

1 

2 

3 

4 

5 

6 

For major multinational clients the prospect of transferring the finance 

function to a ‘Big Five’ consultancy can appear very attractive. When finance 

outsourcing was first treated seriously in the early and mid 1990s, the partners 

in several of these major accountancy-based consultancies made a big effort to 

inform all of their senior contacts in major client companies that they were 

ready, willing and able to meet the challenge of being a service provider should 

it arrive. In addition the impression was given that the service improvements 

and savings could be significant. 

The Big Five appeared to offer the prospect of being service providers who 

could not afford to fail. The assumption was that these providers would not 

risk losing their hard earned reputations and so whatever the problems 

encountered they would ‘throw money and people’ at them until they were 

sorted out. Sadly, events in a couple of outsourcing relationships would appear 

to have shattered this belief. 

The promise of improved service levels, savings, freeing up management time 

to allow concentration on the core activity and other perceived benefits puts 

pressure on finance directors to at least consider this option. Accenture 

(previously Andersen Consulting) and PricewaterhouseCoopers can both 

point to major clients that enjoy finance and accounting costs that are 

currently 50 per cent less than before the service was transferred. 

For SMEs, in particular, there is often the prospect of outsourcing IT and 

finance in one package to a single provider. 

In theory at least, finance outsourcing offers the Big Five and other large 

accountancy-based firms the chance to boost growth and profits. These 

prospects come at a time when audit fees are constantly being squeezed and 

other sections of the firms see similar difficulties ahead. 

Finance outsourcing will allow the accountancy-based service providers a 

greater utilization of specialist skills across the firm.


7 

8 

9 

Finance outsourcing may be unique in that the largest potential providers 

already have the staffing and infrastructure necessary to attack the market 

whilst, unlike IT outsourcing, they are not required to outlay large sums of 

money for equipment. 

Finance outsourcing creates consultancy opportunities in the short, medium 

and long term – conversely if another provider gets in, these opportunities 

may well be removed during the life of the contract. 

All other things being equal, the prospective client will lean towards the provider 

who has the experience. Therefore, in the short term there are bound to be 

special efforts made by the would-be providers who have not yet won enough 

contracts, possibly resulting in greater than normal discounting and equally 

major efforts by the providers who have won contracts to keep the others out. 

The circumstances would appear to exist therefore, for a great deal of marketing and promotional 

effort to take place in support of outsourcing the financial function. The senior 

partners in at least two major providers have suggested that they would be prepared to 

give up the audit of a client company in order to become its financial outsourcing service 

provider. However, there is increasing pressure, particularly from the USA, that auditing 

firms should not be involved in providing other services to clients. It will be interesting to 

see how each of the Big Five reacts to this pressure in pursuing outsourcing deals. 

Over the last few years of the 1990s, European finance directors have been amongst 

the most prolific attendees at outsourcing training courses and have instigated a large 

number of outsourcing enquiries. Experience now suggests that much of this apparent 

interest was done for defensive reasons, i.e. the finance directors wanted to learn as much 

as possible about the subject in order to stop it happening. I am aware of a number of 

cases where the finance director has been instrumental in involving service providers and 

advisers using the carrot of outsourcing the finance function, only to use his or her own 

special position in the organization to outsource some completely different function. 

The unusual features that created IT outsourcing, i.e. having existing heavy investment 

in hardware and systems and needing to move to other expensive hardware and 

systems, can be seen as a problem peculiar to large organizations. Part of the same problem 

– needing to purchase and implement new financial or ERP systems – can be seen as 

a major reason for outsourcing finance but it is by no means the only one. 

The UK government’s desire to bring competition into the public sector has led to substantial 

financial outsourcing contracts being signed in local government, central government 

and the health sector. The creation of the Private Financing Initiative (PFI) by which large 

scale computer and related systems can be purchased under 30 year contracts for services 

instead of purchasing the assets has also increased outsourcing activity over the range of IT

46 


the UK government’s 

desire to bring 

competition into the 

public sector has led 

to substantial 

financial outsourcing 

contracts being 

signed in local 

government, central 

government and the 

health sector 

and BPO areas. Overall this government-inspired activity 

must be one of the key reasons for the interest in finance outsourcing 

in the UK and may well have sparked desire in one 

or two private sector organizations. 

During the 1990s Andersen Consulting grew more 

quickly in Europe than the other members of what is now 

the Big Five. By the mid 1990s Andersen Consulting was 

the only one of these firms directly involved in outsourcing 

IT as service providers. By about 1995 the other big firms 

were very much aware that Andersen had gained significantly 

increased consultancy work in the IT area as a result 

of having tied clients. In other words, if they had not been 

involved as an IT service provider some of this work would 

have gone to other consultancies. They also saw that the 

major outsourcing service providers such as EDS had 

grown their consultancy teams very quickly at a time when their own growth was only 

moderate. Naturally, they again surmised that at least some of this growth must be attributed 

to the tied clients’ factor. For some providers then, growth in consultancy and 

outsourcing is very closely linked and for this reason we must expect some major consultancies 

to be continually on the look out for new finance outsourcing business. 

At the time of writing, the most recent major finance outsourcing deal in the UK 

involved Safeway, the country’s fourth largest supermarket company, and 

PricewaterhouseCoopers. In this deal PWC has obtained a £60 million, ten year 

arrangement to run Safeway’s internal finance and accounting department from 1 July 

2000. More than 350 Safeway personnel dealing with accounts payable, accounts 

receivable, stock and margin accounting, payroll, financial accounting and insurance 

and property accounting were then transferred to PWC. This contract was won after 

keen competition from other major accountancy-based consulting firms and is 

unlikely to be the last major deal of this type. 

Call centres 

The call centre concept is relatively new and already it is getting a very bad press. There are 

certainly some very bad call centres that subject the users to time-wasting ordeals. Typically 

the users’ problems start with a message telling them that due to the excellence of their 

product or service all their operatives are very busy just now, but not to worry because they 

are very special and are in a queue. Then while they wait they are entertained with offensive 

noises. Next they are subjected to numerous requests to press various digits for services they 

don’t want and end with a disappointing discussion with someone who is difficult to understand 

and cannot begin to grasp the nature of the problem.


The call centre theory is based on the sound principle of the people answering the telephones 

being able to access all relevant information via the PCs in front of them. Why, 

then, do the services appear to deteriorate the higher one goes up the technology chain 

Computer manufacturers and internet service providers will argue that the complicated 

nature of their business means that some customers will always raise problems that are difficult 

to solve and that routing and other traffic problems are bound to happen occasionally 

due to rapid growth. Fair enough, but why is there a general perception that high tech help 

desks are not improving and that some of the companies have lost interest in this aspect of 

their service By comparison, call centres operated by insurance 

companies, investment houses and banks do appear to 

have improved quite markedly in recent times. 

setting up call centres 

Setting up call centres and operating them well is nowhere and operating them 

near as straightforward as some people assume. For those well is nowhere near 

organizations that understand and overcome the problems 

as straightforward as 

involved there is considerable scope to offer outsourcing services 

to others. Housing associations, for example, are constantly 

some people assume 

on the receiving end of telephone calls made by their tenants 

and potential tenants. The average housing association is too 

small to set up its own specialist call centre, yet the number and type of calls are suited to the 

call centre concept. At the time of writing, no one has come forward with an independent call 

centre alternative that would spread the costs over a range of such associations. 

The logic for outsourcing call centre work is compelling. Providing the service and 

cost are both acceptable, why go to the considerable trouble of building your own call 

centre from scratch when you could simply take space in an existing unit where the initial 

teething troubles have long since been overcome In addition, it is much too early to 

assume that the typical call centre model is easily defined. Many call centres are being 

restructured into Contact Centres in which communication can additionally be achieved 

via emails and WAP phones. 

The risks involved in call centre outsourcing appear to be very limited when compared 

to other functions and therefore it is likely that this area will see considerable growth over 

the next few years. However, call centre outsourcing clients must recognize that the 

people at the end of a telephone in a remote call centre may be playing a major part in 

the image the organization is projecting to its customers. For that reason they may feel 

the need to directly employ some or all of the supervisory staff. It will also be necessary to 

monitor the service being provided and to compare it on a regular basis with the service 

being provided by competitors. 

Human resources outsourcing 

Mention human resources outsourcing and you often end up talking about two different 

subjects. To some it means outsourcing the specific function, i.e. dealing with health and

48 


safety issues, working conditions, employee discipline, etc. within the client organization. 

Others use the term to describe the concept of outsourcing a group of workers, who are not 

already part of an outsourcing arrangement, to a specialist third party service provider. 

I propose taking this latter concept first in order to get rid of it quickly. I understand 

that specialist IT companies have been known to transfer the employment of all non directors 

to human resources companies that have established recruitment skills in IT. Clearly, 

these client organizations take this action because they have difficulty finding and retaining 

qualified people. There is, therefore, some logic in transferring this responsibility to a specialist 

organization that in theory at least has access to many specialists. Even so, I see a 

potential problem here in that an organization adopting this policy may be relying on ‘contractors’ 

for long-term roles where a dedicated employee would be more suitable. Looking 

outside the IT function, it is difficult to see this concept becoming widely practised. If an 

organization wants to move further along the ‘virtual’ road, it would, in most instances, be 

preferable to transfer each group of employees along with their respective functions to specialist 

service providers in those functions. 

Outsourcing the human resources department is not 

outsourcing the 

human resources 

department is not 

that different from 

outsourcing any 

other function in 

terms of the 

problems to be 

faced 

that different from outsourcing any other function in 

terms of the problems to be faced. However, there is one 

factor that makes it difficult for most organizations to contemplate 

such action. The HR department is involved with 

issues that are critical to the wellbeing of the entire workforce 

and to outsource those responsibilities will normally 

be seen as a strong indication to all concerned that the 

management does not rate these issues highly. In addition, 

it is important to think about the effect on the employees 

being transferred. They should play the caring role in the 

organization. Will they care as much if they are outsourced 

or, more importantly, will they be perceived as caring as 

much In addition, once they are outsourced, will they lose contact with the corporate 

philosophy or culture Will they adjust to their new employer’s culture 

Major organizations appear to be constantly reducing the number of employees on 

their payrolls – a process that shows no sign of slowing down. Nevertheless, for most 

organizations their employees will remain one of their most important assets. When 

redundancies abound it becomes even more important to make sure that the organization 

is perceived as being interested in the welfare of the remaining staff. It is natural in the 

period following major redundancies for employees to want to check out various elements 

of their benefits and sadly this often coincides with a dramatically increased 

workload in the HR department. In such an environment of distrust and fear even the 

introduction of interactive technology that allows employees to update their benefits 

arrangements, retirement contributions and payroll deductions may sometimes be seen as 

a sign that senior management does not care.


None of the above factors can be taken as proof that outsourcing the HR function is 

always right or always wrong. They do, however, suggest that great care must be taken 

before steps that cannot easily be corrected are put in place. 

For major organizations the ‘natural’ HR service providers will be the major international 

consultancies – several are actively pitching for such work. And yet over the last 

few decades these consultancies must have under-performed the rest of industry in HR 

management by a very long way. Excessive staff turnover in the HR departments of these 

major consultancies has been the norm for a long time and HR management has often 

been a sinecure for tired or failed partners. Having said that, I have to admit that if I were 

under pressure to outsource a major HR department I would be drawn to considering 

these firms. Let’s face it, these organizations employ bright people and they ought to be 

able to create top class HR services using the latest technology. 

Finally, it is worth remembering that in most of the developed world the client is rarely 

able to transfer full responsibility for staff simply by outsourcing them and placing them on 

another organization’s payroll. Given these factors I would not expect an enormous rush 

amongst established organizations to outsource this function. I would, however, expect 

some growth in HR outsourcing companies that make most of their income from providing 

specialist personnel managers on a part-time basis to small companies. 

Facilities management 

Third party management of property and other physical assets has a long history and was 

certainly well established before the outsourcing of IT became popular in the late 1970s and 

1980s. As much of the original IT outsourcing was largely based on physical assets like 

mainframes, it was natural for many people to talk in terms of facilities management or FM 

when describing IT outsourcing. Gradually, however, the term FM became confined, as far 

as IT is concerned, to situations where legacy hardware and 

systems are maintained by third party organizations in a run 

down mode. 

Facilities management as it relates to property continues to 

expand and in many Western countries third party specialists 

manage the vast majority of major buildings and business 

sites. Facilities management specialists now offer a wide range 

of services including planned maintenance, estate management, 

landscape management, new building project 

planning, benchmarking and relocation management. 

It is difficult to imagine anything but further growth in 

facilities management because fashion or trends in other 

business areas have not, so far, affected its success. For 

it is difficult to 

imagine anything 

but further growth 

in facilities 

management because 

fashion or trends in 

other business areas 

have not, so far, 

affected its success

50 


example, in the UK many areas of outsourcing have been given a boost by the government’s 

policy of privatization. That is certainly not true of facilities management. In mid 

1999 it was announced that Trillium, a partnership between Mitie and Goldman Sachs, 

won the contract to run the 700 buildings belonging to the Department of Social 

Security. This was the first transfer of UK government properties to the private sector, but 

other government departments are now showing various levels of interest in the concept. 

Outsourcing from inside the industry 

It is sometimes possible for an organization to become a service provider for its competitors 

and still be in competition with them in other areas. The financial services sector is 

currently throwing up a number of interesting examples of client organizations that are 

seeking competitive salvation by outsourcing services to apparent competitors and others 

that are happy to adopt the service provider role. 

Churchill Insurance has adopted a service provider role in certain parts of the UK 

insurance business. As an example, United Assurance recently outsourced its general 

insurance business to Churchill Insurance. In this deal, United Assurance will continue to 

sell general insurance products but they are underwritten and serviced by Churchill. The 

servicing responsibilities taken on by Churchill include telesales, policy servicing and 

claims handling. 

Within the retail banking industry there is a small but growing trend for some banks 

to provide a range of business processing services to other competing banks. This can 

happen when a bank is in ‘start-up’ mode in a new location, when entering a new area of 

business or simply because competitive pressure makes it the best option. This type of 

service provider is becoming a factor in other areas of the banking industry. For example, 

in the investment banking industry Deutsche Bank has been providing a range of BPO 

services for Abbey National Treasury Services since 1995. Deutsche Bank claims that in 

certain areas of investment banking it has enabled Abbey National to act as a virtual 

bank, because it has been able to set up a trading business without having to build the 

delivery mechanism. 

It is interesting to speculate how this practice might develop. There are some people in 

the banking industry who believe that the European banks will have to pay a high price 

for the efforts they were forced to make over the late 1990s in order to become Euro and 

Y2K compliant. They argue that in the rest of the world this time was largely spent 

improving the flow of transaction processing by adopting newly available technology. The 

obvious conclusion from this is that the European banks have a lot of catching up to do if 

they are to achieve a reasonable competitive standing. 

Any sizeable organization that realizes that it is in danger of falling behind in the competitive 

stakes must seriously question its chances of catching up. Whatever the industry


it must be accepted that catching up now will be much more difficult to achieve than at 

any time in the past. Just when you have installed and implemented the latest technology 

to gain the competitive edge you find your competitors are moving on to the next development. 

More positive managers will reason that once their competitors have 

implemented the next year’s technology developments, they will, in turn, enjoy a competitive 

advantage for only a short period of time. The sceptics will counter this by pointing 

out the damage that could result in the meantime. This is the classic scenario that causes 

organizations to think about the main alternatives to going it alone – sharing services 

with competitors, outsourcing or preparing the company for acquisition. 

The banks, of course, are suffering the brunt of the technology revolution. The advent 

of telephone banking alone would have been sufficient to bring about dramatic reductions 

in the number of branches remaining open. But the television and internet 

potential raises all manner of questions about the future nature of banking that cannot be 

fully answered at this point in time. 

Obviously, the mergers and acquisition alternative will continue to play a part in the 

future, just as it has done in the past. If a bank does not fall victim to an acquisition, its 

management will be hoping that some magical new marketing initiative will be developed 

that will dramatically increase business – it’s always far easier to obtain improvements and 

savings when business is booming. If the marketing breakthrough is not forthcoming 

then we are back to improving competitiveness by either internal project, sharing services 

with other banks or outsourcing. 

The banking industry has probably gone through more 

internal performance improvement projects than any other 

sector. As a result, I would expect that senior executives in 

the large banks would now look at the prospect of carrying 

out major new internal projects with some trepidation. 

The creation of industry-shared service centres, where 

each participating bank contributes according to its size 

and needs but no one bank acts as the service provider, will 

probably win some advocates. To make a success of an 

arrangement like this it will be necessary to create a separate 

joint venture under independent management. 

the banking industry 

has probably gone 

through more internal 

performance 

improvement projects 

than any other sector 

The outsourcing option is probably more difficult for the banking sector than it is for 

other sectors because it is always going to be more difficult to split the processes into convenient 

packages that can be distributed between different providers. Given this situation 

it is difficult to see anything other than an existing bank being able to offer complete 

BPO services to the industry. This leads to the fascinating idea that some existing banks 

might eventually reposition themselves as service providers.

52 


Contract manufacturing 

Contract manufacturing is yet another facet of outsourcing that is bursting out in all 

directions. Just think of all the products on the supermarket shelves around the world featuring 

the supermarket’s own label. In the early days of contract manufacturing the 

supermarket’s own branded products were probably manufactured by companies manufacturing 

and selling well-known competitive brands on nearby shelves. Now companies 

who do not have branded products of their own do much of this manufacturing. 

Electronics is another area that has been transformed by the activities of the contract 

manufacturers. Many of Europe’s original computer manufacturers collapsed or moved 

into other areas of the computer business in the 1980s and early 1990s because they 

could not manufacture to the desired quality and price. Within a few years they were 

replaced by scores of new manufacturers such as Time Computers Ltd and Tiny 

Computers Ltd in the UK. The contract market for electronics had moved on to the stage 

where these new companies are effectively assemblers of parts made by other organizations 

around the world. This situation enables the Tiny Computers of this world to 

concentrate on their core activity of dealing with customers, safe in the knowledge that 

almost all new technology developments will be available to them on demand. 

Therefore any entrepreneur with a good idea and access to capital can buy the manufacturing 

capacity and the non-core services such as distribution and finance that are 

necessary to run what appears to be a manufacturing business. In the electronics examples 

above it has been argued that Tiny Computers outsourced its core function and became a 

virtual company. In reality the company’s core business is dealing with customers through 

retail shops and direct mail, so they have not outsourced their core function and they are 

not a virtual company. 

Contract manufacturing of electronic components is a very big business. Various US 

estimates suggest that on a global basis it is worth $70 billion annually and is growing at 

between 15 and 20 per cent a year. 

Some contract manufacturers are relatively new companies, created because entrepreneurs 

saw an opportunity. Some began as small assembly shops operating as 

sub-contractors to larger companies, others were set up by existing giants in the marketplace. 

Boots Contract Manufacturing, or BCM, for example, was the brainchild of Boots 

the Chemist, the UK high street chain of chemists. BCM is now the largest contract 

manufacturer of pharmaceutical products in Europe. 

In the same general market, other providers have become more specialized than general 

contract manufacturers. Oxford Asymmetry International, for example, provides 

outsourcing services for pharmaceutical and biotechnology companies but concentrates 

on early drug development and production for clinical trials.


Insourcing 

There are a variety of activities that might justifiably be 

called insourcing. SAGA, the established UK supplier of 

holidays to the over-50s, realized a number of years back 

that its database was an extremely valuable asset. In recent 

years it has benefited from the fact that it contains names 

and addresses of relatively wealthy people of mature age 

who are statistically less likely to have car accidents or 

there are a variety of 

activities that might 

justifiably be called 

insourcing 

incur damage to their property than their younger and perhaps less well-off counterparts. 

SAGA argued that as a group these mature clients ought to benefit from cheaper insurance 

in these areas. This knowledge has enabled them to take a significant share of both 

the UK household insurance and car insurance markets. Recently the company extended 

its new range of services to include credit cards, gas supply, electricity supply, electrical 

goods, share dealing, investment schemes, savings schemes and dietary supplements. 

SAGA is effectively the front for the front office organization, with much of the actual 

work being done, originally at least, by long established insurance companies, who deal 

directly with the client from the first telephone call onwards. The temptation will be for 

organizations that add new services in this way to do more and more of the work in 

house to maximize its own profit. Whether this would be a wise move remains to be seen 

and depends to a large extent on the tactics used. 

In the same way, supermarket groups such as Sainsbury and Tesco have capitalized on 

the fact that shoppers increasingly visit out of town stores on a one-shop basis. The large 

stores and the resulting great range of products and services on sale, together with the out 

of town factor have all made it difficult to visit more than one shop on a single shopping 

trip. These supermarket groups are taking advantage of this situation in a number of 

ways. Perhaps the most startling is the venture into retail banking. The supermarket 

groups have a number of advantages over the traditional banks in that the customer is 

already on the premises and can often obtain additional cash without the trouble and cost 

of writing out a separate cheque. A favoured customer can write one cheque or provide a 

one card transaction that covers both purchases and any additional cash required. Major 

and long established banks do the actual banking behind the scenes, but most if not all 

the customer contact comes via the supermarket employees. 

The major banks are being forced to close branches on a regular basis because of new 

banking alternatives. These banks also have extensive records of individuals and they have 

added information about real income levels. It is therefore possible that some of these 

banks may fight back by selling other goods and services via the internet. 

Insourcing has been used as a way of safeguarding a marketplace. Imagine a situation 

where a specialist manufacturer of plastic paint coverings has a long established exclusive

54 


contract to supply its product to a major international company that has found increasing 

benefit from coating more and more of its products in plastic. The contract has gradually 

become a major part of the plastic company’s business and with this has come awareness 

that loss of the contract would put its future existence in doubt. 

Given this situation, it would be reasonable to try to establish a further long-term 

arrangement with the customer well in advance of the original contract ending. Knowing 

that any follow up contract is likely to be decided largely on price, a number of organizations 

in similar circumstances have adopted the insourcing formula to safeguard 

themselves. They therefore, offer the customer a number of ‘outsourcing’ benefits even 

though the work continues in the customer’s premises as before. These benefits will probably 

include a price that will be stable over time, plus a quality and delivery guarantee of 

some description. In order to provide these guarantees the supplier will probably request 

that certain employees be transferred to its payroll, even though there is little likelihood 

of the individuals concerned working away from their current site. 

In theory, at least, this type of arrangement can benefit the customer in terms of cost, 

delivery, quality and peace of mind, whilst safeguarding the supplier’s future. 

Software maintenance support 

one area of 

outsourcing that more 

and more companies 

are considering is 

software maintenance 

One area of outsourcing that more and more companies 

are considering is software maintenance. Typically software 

companies charge an annual fee of 15–20 per cent of their 

‘list’ prices for maintenance. 

Maintenance coverage usually includes: 

● 

● 

● 

hot line telephone support 

fixes to reported software bugs 

upgrades to the latest software releases. 

Maintenance represents a substantial portion of all software suppliers’ revenues. In fact, 

many suppliers have been able to survive slow periods solely on their maintenance fees. 

However, if you analyze how software suppliers spend their maintenance revenue, you 

discover that the majority of maintenance is spent on developing new software releases 

and only a relatively small portion is spent on providing hotline or bug fix support. 

Like all products, software goes through a lifecycle. Therefore, when a user organization 

decides that it does not want to purchase any more upgrades of a software 

product, they should consider outsourcing their maintenance to a third party. Software 

supplier maintenance, at this stage of the lifecycle, is often a waste of money because 

the user organization:


● 

● 

● 

● 

is on a very stable version of the product; 

rarely reports any new problems to the supplier; 

is usually told by the supplier to upgrade to later releases to fix any outstanding 

problems; 

has no intention of spending time and resources upgrading. 

Expert third-party maintenance support organizations have evolved which provide software 

‘insurance policies’ that guarantee organizations receive expert advice and support in 

times of need. One such company, Centaur Application Software Services, claims that the 

cost of third-party maintenance can be as little as 15 per cent of the cost of the supplier’s 

maintenance fees. Another advantage of third-party maintenance is that organizations can 

tailor the support to their own unique needs instead of accepting the supplier’s usual 

maintenance terms and conditions. 

Outsourcing software maintenance means that organizations only pay for the support 

and insurance that they actually need. They are no longer paying for the development of 

new software releases they never intend to use. 

Outsourcing marketing functions 

In some organizations, business functions and processes may be deemed prime candidates 

for outsourcing simply because they are not core to the organization’s main activities. 

Some functions or processes like payroll, for example, are not only non-core but also the 

transaction activity is irregular and can be confined to certain periods of the month. In 

these circumstances most people can see the advantages of outsourcing. Yet other functions 

are not only non-core and used infrequently, but they require specialist skills that 

cannot normally be justified for a single enterprise 

Into this category come a variety of legal services and a range of marketing activities 

such as advertising and market research. Most advertising and market research work is 

done on an external basis with only a relatively small number of major organizations 

attempting to duplicate these services in house. Advertising agencies in particular need to 

develop specialist skills in a range of areas, from design of advertisements to media buying 

and dealing with artists and performers used in commercials. To all intents and purposes, 

advertising is as fully outsourced as its ever likely to get and the same might be said for 

some of the services relating to advertising. For example, one company, Donovan Data 

Systems, supplies 98 per cent of all the computer systems and back up used by European 

advertising agencies, and has almost the same penetration in North America. 

Throughout most of the twentieth century generalized sales organizations have existed 

that were prepared to provide additional teams of sales people to any organization that

56 


might require them. Typically a company needing to increase its sales activity would 

employ one or more of these sales people in special sales drives aimed at householders or 

retailers. By the 1950s and 1960s specialist teams were developing in the Western world 

that concentrated on a particular marketplace and therefore were perceived as up-market 

operations. The prime example in the UK was Food Brokers Ltd, which as the name suggests, 

concentrated on selling to the supermarkets and other retailers that included food 

and related products amongst their wares. The outsourcing 

of sales activities utilizing people on a face to face basis, did 

marketing 

departments are 

being outsourced, 

but not in sufficient 

numbers to indicate 

that a significant 

trend is taking place 

not increase very much over the last half of the twentieth 

century and there is little evidence that further growth is in 

the offing. 

Marketing departments are being outsourced, but not 

in sufficient numbers to indicate that a significant trend is 

taking place. This area is sufficiently sensitive and important 

for most organizations to suggest that outsourcing 

ought perhaps to be confined to situations where the client 

can obtain an equity stake in the service provider.

chapter 

5 

variations on the outsourcing theme 

Value added partnership 59 

The service provider’s shared 

service centres 60 

The client’s own shared 

service centre 61 

Joint ventures 62 

Application service 

provider outsourcing 63

variations on the outsourcing theme 59 

Value added partnership 

At a time of unprecedented change there are obvious problems in setting rigid contracts. 

How can any organization be certain enough of its IT requirements over a four or five 

year contract How can anyone be certain that the desktop equipment currently in use 

will not be out of date in just two or three years’ time 

Nevertheless, I accept that there are a small number of client organizations who will 

feel that the function or group of processes to be outsourced is pretty stable – nothing 

much has changed over the last ten years, why should it change over the next ten Where 

there is such confidence that change will not be a problem, 

then and only then, should a client organization contemplate 

a rigid contract. For the vast majority of situations, 

however, the outsourcing will take place in an atmosphere 

of future uncertainty. 

Of necessity then, outsourcing arrangements ought to 

be flexible enough to allow for accelerated change, whether 

that change comes from technology, market changes or the 

client organization’s market share. 

The value added partnerships all have one thing in 

common – the ‘risk/reward’ element. Some of the very 

early outsourcing deals were so rigid that they allowed for 

almost no change to take place during the life of the contract. 

This enabled service providers, who may have been 

working on very tight margins to increase their profits significantly 

when charging for extras. Clients, who because 

outsourcing 

arrangements ought 

to be flexible enough 

to allow for 

accelerated change, 

whether that change 

comes from 

technology, market 

changes or the client 

organisation’s 

market share 

of acquisition or growth in core business asked the provider for 20 per cent more work 

and expected a 20 per cent increase in charges, were often outraged when providers 

wanted to increase the charge by 50 per cent or more. Typically, independent assessors 

used to estimate the fair additional cost to be somewhere between the warring parties’ 

own estimates. Obviously, change is not just something that happens as a result of growth 

or acquisitions. Consequently, extra and special tasks are part of the outsourcing service 

provider’s lot and payment for these tasks can be a very delicate issue. 

In theory, risk/reward partnerships enable the client to offset the risks implicit in a 

rigid contract by offering the provider a deal that restricts increases or decreases in charges

60 


to some pre-agreed formula in exchange for a share in measurable improvements that the 

provider makes to the service. In reality, human nature being what it is, the service 

provider often strives to remove most of the risk and the client does the same with the 

reward. For that reason not all risk/reward contracts achieve what was originally intended. 

Nevertheless, for an outsourcing to be successful in both the short and long term, the 

service provider must be offered a carrot as well as a big stick. 

The service provider’s shared service centres 

the provider-owned 

SSC is likely to play a 

growing part in 

outsourcing in the 

years ahead 

Quite naturally, most service providers see great benefits in setting up their own shared 

service centres (SSCs) where, for example, the business processes or IT functions of a 

number of clients can be handled under one roof. Clearly in this way the provider can 

maximize the economies of scale. 

At first sight this concept has a lot going for it. A service provider setting up an SSC, 

for, say, finance would be able to keep adding to the list of organizations it was servicing 

from one location. In theory, therefore, this growth alone would go a long way to ensuring 

that the systems were being updated on a regular basis and that the latest technology 

was being used. It would also mean that design and implementation errors from the last 

project could be corrected more quickly than in the normal single function site. 

Major providers like Accenture have in the past announced that they were setting up 

large SSCs in some central location from where they hoped to ‘house’ the services for new 

and unspecified clients. 

Some providers have achieved a significant measure of success in promoting SSCs of 

this type, but for the most part clients are initially wary of such arrangements. The 

smaller client will start off by assuming that the larger clients will get an unfair share of 

the service. Against that the larger client imagines that if his or her service accounts for 

50 per cent of the total, but there are five other clients – then they will get less service 

than they deserve and need. 

Competing providers sometimes put an outsourcing service provider who wants to take 

the service away to another part of the country or to a different country, at a considerable 

disadvantage. This happens most often when providers who do not have their own SSC 

decide to stress the importance of the new outsourced facility 

being within walking distance of existing facilities. 

The provider-owned SSC is likely to play a growing part 

in outsourcing in the years ahead. Major clients will often 

want to stipulate the exact location where the service will be 

delivered, but in most instances the provider will still be free 

to extend the business done in the SSCs by taking the work 

of smaller clients into the premises. For many of the BPO


deals in existence the outsourcing only makes sense (at least from the service provider’s 

point of view) if multiple arrangements can be brought together under one roof. 

The client’s own shared service centre 

The term SSC is most commonly used to describe attempts by major client organizations 

to centralize a function like finance by continent or even globally. Multinationals have 

always been concerned about the theoretical waste involved in having separate accounting 

and other services in all or most of their overseas subsidiaries. 

Few of these major organizations had risked making any moves in this direction until 

the onset of the 1990s. But then communications and other technological advances 

reached a stage that made their desires a possibility. Elizabeth Arden, Union Carbide, 

Whirlpool and Mars had all centralized their accounts in one European country by the 

first half of the decade and many others have since followed suit. The European finance 

directors of many of the American multinationals now meet on a regular basis to swap 

ideas on how to improve the service from their SSCs. In effect, they have created a benchmarking 

club. 

Tax advantages and the relatively low cost of employment may both be positive factors 

for centralizing in some countries whereas culture difficulties may be negative factors. 

By the middle of the 1990s it was generally assumed that if a multinational carried out 

sound re-engineering of its total finance operation then it could achieve savings of around 

30 per cent on what existed prior to the centralization. However, a widely held view also 

developed that a further 10 per cent may be possible for the client company if a major 

outsourcing service provider was involved to ensure continuous improvements. 

Inevitably, this led to a number of arrangements where ostensibly the client organization 

started by trying to develop a global or continent-wide SSC to be run and managed 

entirely in house, but then changed tactics before the project ended. It was often a surprise 

to many people when the consultants helping with these changes were brought in as 

joint venture partners. Each new deal of this type appeared to differ quite significantly 

from the one before it. 

For example when, in mid 1997, Shell Oil set about creating continent-wide SSCs for 

its finance area it eventually chose to enter into a 50/50 European partnership with the 

firm that had done its audit for over 100 years, Ernst & Young. The resulting joint venture 

is called Tasco Europe and is based in Glasgow. 

Shell decided upon the SSC route after carrying out an extensive feasibility study. 

However, after taking into account the speed at which it needed to work and the consolidation 

work necessary over many individual companies across Europe, it decided to look 

for a partner. Six service providers expressed interest and Ernst & Young was chosen. 

Like most of the big accountancy firms at the time, Ernst & Young had only limited

62 


experience of actually doing day-to-day accounting transactions but it was very keen to 

get into the accounting outsourcing market. 

Shell and Ernst & Young both fund 50 per cent of the joint venture and have equal 

representation on the board. However, every effort has been made to make Tasco independent. 

To begin with it had to ‘sell’ the benefits of the new service to each of Shell’s 12 

Western European subsidiaries. 

Tasco has set itself a target of becoming the European market leader in accounting 

services. To do this it has to find new independent clients. Presumably, most of these 

clients are targeted to come from the ranks of the multinationals that have operations in 

different parts of Europe. 

At the time of writing it would appear that Tasco Europe has made some significant 

progress both in integrating the services of the Shell subsidiaries and in its preliminary 

discussions with potential new clients. Nevertheless, I think that it will be some time 

before they can be sure that all the potential ongoing benefits have been achieved. In a 

conventional outsourcing arrangement the service provider 

will be expected to assume responsibility for the future 

the risk inherent in 

these 50/50 SSC 

partnerships is that 

the leadership and 

responsibility for 

development 

direction is not 

always so clear-cut, 

even where the 

contract specifies 

each party’s 

responsibilities 

design of systems. The provider will be seen as the specialist 

organization and the client’s staff, both those retained 

and those being transferred, will usually accept the logic of 

the service provider’s leadership. The risk inherent in these 

50/50 SSC partnerships is that the leadership and responsibility 

for development direction is not always so 

clear-cut, even where the contract specifies each party’s 

responsibilities. This will be particularly true where two 

strong teams are brought together as is the case with Shell 

and Ernst & Young. Therefore despite Tasco Europe starting 

off with a fistful of advantages, there will be some 

difficulties to overcome and it remains to be seen how successful 

this venture will be. 

Joint ventures 

The partnership between Shell and Ernst & Young was illustrated above to describe a 

shared service centre project. But it is also a good example of a client and a service 

provider coming together, initially to achieve a long-term competitive position for the 

client and then to make additional profit by selling the service to third parties. Other 

similar joint ventures include Connect 2020, set up by Andersen Consulting and Thames 

Water in 1995 to provide total supply chain management solutions to the utilities industries 

and other markets. The first customer was Thames Water but third party customers


were targeted from an early date and by the end of the first year of operation Connect 

2020 had won a number of new consultancy contracts. At about the same time Perot 

Systems, an IT and outsourcing services provider, set up a joint venture with East 

Midlands Electricity (now part of Powergen) and quickly obtained significant sales of the 

products they developed throughout Europe. 

Joint ventures are also on the increase between outsourcing service providers. For example, 

Computer Sciences Corporation (CSC) recently joined with The IT Group, Inc, to 

form Mississippi Space Services (MSS) to provide facility operation services at NASA’s John 

C. Stennis Space Center in Mississippi. Clearly, joint ventures created on this basis will normally 

be confined to working for just the original client. However, it is always likely that 

new products or services could be created during the ongoing development work that will 

have a ready market in the wider world. If this should happen and the client is agreeable, 

then presumably a separate joint venture would be formed with the client. 

Some outsourcing service providers have created joint ventures without apparently first 

having a client in mind. For example, in late 1999, LOR Management Services, a Los Angelesbased 

provider of accounting and applications outsourcing services, announced a joint venture 

with AIL Technologies Inc, a designer and supplier of electronics, computer hardware, software 

systems and services. The agreement is intended to join LOR Management’s expertise hosting 

clients’ process-oriented accounting functions with AIL Technologies’ computer hardware systems 

implementation and software development expertise. Quite obviously this arrangement 

has been created to enable the two companies to approach the market with a total IT and BPO 

service without having to merge their entire operations. 

The development of the internet has already been responsible for a dramatic increase 

in the number of joint ventures being set up and this can only increase. In March 2000 

Accenture, as it is now, and Microsoft Corporation announced a new joint venture called 

Avanade that, subject to regulatory approval, will deliver internet-specific and other 

enterprise platform services based on the Windows 2000 operating system platform. 

Under the $1 billion agreement, Microsoft will provide $385 million in cash to support 

Avanade, as well as solutions, development support and other intellectual capital. 

Accenture will provide intellectual capital, training, resources, solutions development and 

other services. Clearly, joint ventures are now being created in a variety of different ways 

depending upon the demands of the situation. 

The subject covered in the next section – ASP outsourcing – is likely to spawn many 

such ventures. 

Application service provider outsourcing 

Technology-driven change did not start with the internet but its evolution has resulted 

in an exhilarating, if frightening, lifestyle for senior IT managers. Managing an IT

64 


department of any size has always been a difficult job but the arrival of the internet 

appears to be making it a lottery. How can you plan for even the near future when new 

internet ventures appear to challenge the existence of everything you are working with 

and offer the prospect of doing everything quicker, better and more cost effectively, and 

yet, so far, relatively few of these magical solutions are proven and available 

One such solution, application service provider (ASP), might make the ERP concept 

of organization-wide integrated systems ultimately work for the many rather than the few. 

The big problem with enterprise resource planning systems is that because organizations 

need to customize between 15 and 30 per cent of the system, the implementation can 

take years rather than months. Normally implementation also involves costly outside help 

and causes considerable internal disruption. In any ERP implementation there is clearly a 

relationship between the time taken, the resultant attempts at short cuts (usually 

described by other names) and the risk of failure. 

The ASP concept has an outsourcing service provider 

delivering internet-based applications for a range of clients. 

the ASP concept has 

an outsourcing 

service provider 

delivering internetbased 

applications 

for a range of clients 

Most current scenarios anticipate the ASPs developing 

from small and medium sized firms of consultants who 

specialize in a single or a small number of software packages. 

Against that, EDS also describes itself with every 

justification as an ASP. EDS maintains around 300 ERP 

related arrangements on a worldwide basis and appears 

very excited about the opportunities that Web hosting of 

major software products provides. 

In the arrangements that have been put together so far, 

the ASP finds and builds the relationship with the client and supplies any ‘local’ hardware 

required. The link through the internet is then secured by entering into a partnership 

with the relevant software house and an internet service provider. 

In this way the ASP takes responsibility for the implementation of the software, future 

system updating and support. In theory, this offers the client an ‘externalization to outsourcing 

specialists’ deal of enormous flexibility: 

This added flexibility is due to a number of factors. 

1 

2 

The ASP would be able to work for more clients per number employed than 

in a conventional outsourcing arrangement. 

There is less need and justification for the very detailed work normally 

considered essential in setting up an outsourcing arrangement, i.e. all the work 

involved in the transition from producing service level agreements to the 

contract itself would be simplified because a system leasing deal is in place.


3 

4 

5 

6 

Compared with a conventional outsourcing, the ASP would benefit by doing 

much of the work on a repetitive basis for past, present and future clients and 

it would not be anywhere near as disastrous to lose a client. 

The transitional consultancy time ought to be reduced. 

Although much of the implementation of the new system and the ongoing 

running of it will have been outsourced, it will not feel like an outsourcing to 

the internal staff. 

The opportunity will be there for the ASP to be made responsible for 

continuous improvements to the system. In fact, continuous improvements 

ought to occur almost automatically as the ASP works with new clients, then 

finds better and improved ways of working and updates existing clients with 

all improvements. 

Taking these benefits into account, a number of ASPs have offered deals which have 

allowed their clients considerable flexibility in terms of contract length and have removed 

some or all up front costs in favour of a regular fee. The client connects to a server maintained 

by the ASP and uses the required software from that server on a monthly or annual 

fee basis. In theory the only software that will be required on the client’s PCs will be a 

web browser. The ASP’s server will run the application and so create the so-called ‘thin’ 

client solution. 

Many of the world’s leading computer companies such as Microsoft and IBM and 

communications giants like AT&T have taken, or are taking, steps to get involved with 

this marketplace. Most of the leading software vendors are either firmly entrenched or are 

playing with the concept. Some observers have expressed surprise at this interest because 

ASP deals will require renting or leasing arrangements instead of the highly profitable up 

front licences that have been one of the lynchpins of the packaged software industry to 

date. In reality, though, the major software vendors have no alternative but to cover each 

new development as it arises – if they don’t, someone else will. The probability is that 

most major ERP software vendors are all frantically working to make their software packages 

Web-enabled server centric so that they can deliver thin client solutions. The thin 

client model is now the preferred software recommended by industry gurus to reduce the 

ever increasing total cost of ownership of fat client systems. 

Against that, some industry observers firmly believe that at least two of these large 

software suppliers are desperately hoping that the ASP concept fizzles out somewhere 

along the way and well before they have been forced to invest heavily in it. To a 

large extent it will depend on how the software vendor perceives its own immediate 

future. Web enabling of software offers the large vendors a number of potential benefits

66 


including a possible reduction in the pirating problem, smoother, less costly marketing of 

updates and gives the customer, in theory, a chance to try the product before buying. 

Some people argue that there are still significant problems to be faced, because the 

time taken to download the applications necessary with a major ERP currently makes the 

practice questionable in certain situations. Against that, there are many high speed downloading 

alternatives to the 56K modem and it would be surprising if downloading time 

turned out to be a limiting factor in the long run. 

For the reasons given, the small and medium sized marketplace (SMEs) has been the 

main target for ASP activity and consequently the most enthusiastic software vendors are 

those supplying products for SMEs. However, even these software vendors don’t appear to 

be totally convinced that they are taking a step that will be beneficial to them over the 

long term. It is fair to say that some of these software vendors fear that the development 

of the ASP concept will allow Microsoft to take a major share of this market. Equally, 

some of the fledgling ASPs fear that they could lose out in the long run to both the software 

vendors and the internet service providers. Considering this caution, it may be that 

the ASP concept would have not got going if it had not been for the dramatic 1999 

downturn in business software sales. 

Some of the internet service providers (ISPs) that direct their services to business users 

appear to be making a big effort to develop the ASP market. As it will be a relatively easy task 

for them to host major software applications, it appears too big an opportunity to ignore. 

Considering the facts available, it is difficult to see why the ISPs should not be successful in 

their attempts to build a major new market providing they 

get the desired interest from the marketplace. If they do not 

some of the internet 

service providers 

(ISPs) that direct their 

services to business 

users appear to be 

making a big effort to 

develop the ASP 

market 

get such support they could be tempted to build their own 

software and create their own ASP teams. However, there is 

an enormous difference between managing a group of servers 

and providing business applications to the larger end of the 

business world. A new ASP will have to provide adequate 

support services from day one. 

Despite the promises of a rich new market for ISPs, software 

vendors and hardware suppliers, and cheaper and far 

shorter implementations, we cannot yet be certain that the 

ASP concept will achieve its undoubted potential. It will, 

after all, require a major effort by leading companies to 

bring about the necessary changes and many of the current leading players in this market, 

such as the large consultancies, are not really sure they will benefit from these changes. 

If it does succeed, it will almost automatically provide clients with an advantage not found 

in any internal performance improvement projects and most outsourcing arrangements – the 

opportunity to remain competitive in the function or functions concerned. This will depend 

on the nature of the deal reached between the parties and the ASP’s ability to regularly make 

improvements to the system. Nevertheless the opportunity would be there.

chapter 

6 

points to be aware of when 

choosing a service provider 

The tendency to take on 

unsuitable work 69 

Use of sub-contractors 70 

Size matters! 71 

Different clients, different 

quality of service 73

points to be aware of when choosing a service provider 69 

The tendency to take on unsuitable work 

In 1995 I was asked to talk to the management of a publishing group that claimed to be 

interested in outsourcing all its non-core functions. Most of the senior executives were at 

the meeting, with the exception of the chairman. During the first few minutes it became 

obvious that the chairman was the main instigator of the potential outsourcing project. It 

was also clear that roughly half of the directors present wanted a serious investigation to 

take place but the others appeared to be going through the motions. 

Prior to my arrival they had agreed amongst themselves that it would be very beneficial 

in terms of limiting disruption, if one provider could take on all these non-core 

functions. I pointed out that the key reason for outsourcing was to take advantage of specialists 

in each function. One of the directors then introduced the name of a well known 

service provider and consultancy and although admitting no prior contact with the 

organization, expressed the view that ‘they must have specialists in every conceivable business 

practice’. Despite my doubts, I was asked to contact the major provider and seek 

clarification that they would be willing to take on all the functions. I was asked not to 

divulge my client’s identity at this time. 

Amongst the functions being considered for outsourcing were finance, IT, human 

resources, the design studio and telemarketing. I was therefore, quite surprised when my 

contact at the major service provider came back to me stating that ‘subject to the work 

not containing too many surprises, they saw no problem with taking on all the functions 

listed’. The only qualification was that they reserved the right to sub-contract certain 

functions to other suppliers if all parties deemed that beneficial. 

The publishing group quickly gave up the idea of outsourcing and I am pretty sure 

that they have not given it serious consideration since that time. I cannot be sure that the 

offer to take on all the functions was the deciding factor but I am sure it played a part in 

the final decision. One or more of the directors concerned probably considered it a triumph 

of defensive tactics, whilst others would consider that the service provider got the 

just reward for greed. 

Many providers would argue that greed does not come into the equation at all. Their justification 

for this view is that after a while the provider’s core competence becomes the supply 

of an external service, whichever business processes that might involve. Certainly, there is evidence 

that providers have sometimes picked up work that was new to them, then got other

70 


nevertheless, for an 

outsourcing service 

provider, irrespective 

of size, there must be 

a significant risk that 

venturing into too 

many business areas 

will reduce the chance 

of it maximizing its 

performance in any 

one area 

similar work on the back of it and eventually became competent 

specialists in that work area. Anyone who has been party 

to the range of processes and functions passed by government 

departments to individual private sector companies will confirm 

that this has happened quite frequently. 

Nevertheless, for an outsourcing service provider, irrespective 

of size, there must be a significant risk that 

venturing into too many business areas will reduce the 

chance of it maximizing its performance in any one area. 

Any client organization seeking a service provider for outsourcing 

would be wise to look at where their potential 

providers are positioned in this respect. 

It is important to make a distinction here between 

service providers taking on related functions, which is 

inevitable and unlikely to weaken creativity and effort, and 

unrelated functions, which could result in such weakness. 

An example of related functions can be found in the insurance industry, where organizations 

like the Eastgate Group and Hampden Plc provide a mixture of IT, finance and a 

variety of insurance process services for companies in both run-off and start-up mode. 

Both these organizations became service providers as a result of the collapse of a number 

of Lloyds syndicates in the wake of the asbestos claims crisis. Effectively these syndicates 

were put out of business but they had to keep functioning to pay off debts. In a situation 

where there was no future remaining in the syndicates for ambitious executives, both 

companies were formed to take advantage of the situation and started covering all the 

related functions from day one. As a result both organizations have the experience and 

background to offer both finance and IT services to medium sized clients both inside and 

outside the insurance industry. 

Use of sub-contractors 

In the early stages of their outsourcing experience, clients tend to assume that the chosen 

service provider will do all the work to be transferred. However, in practice, sub-contracting 

plays an important part in a significant number of contracts and has done so since the 

early days of IT outsourcing. Consequently the sub-contractor issue is very likely to play 

a part in most arrangements at some stage. 

Often the service providers will introduce the subject in a way that suggests that the 

functions or services to be dealt with on a sub-contracting basis are all non-critical. It may 

be argued that this is a perfectly reasonable opening ‘sales’ gambit even if they have every 

intention of eventually sub-contracting elements of work that most people would deem


critical to the success of the overall service. After all, it is reasonable to assume that they 

would not consider the sub-contracting route if this were not in the best interest of maximizing 

the service. In addition, they might also argue that introducing this subject too 

early in the discussions is only going to cause unnecessary concern to the client when all 

past evidence would indicate that there is rarely any cause for concern if sub-contractors 

are handled correctly. Certainly the general industry view is that the use of sub-contractors 

has not in itself been the fundamental cause of failure on that many occasions. 

Nevertheless, just suppose that the sub-contractor has been brought into the arrangement 

because the prime service provider does not have the basic skills necessary to 

perform certain key tasks. Given such circumstances, the identity and suitability of the 

sub-contractor is of vital importance to the client organization. The client organization 

must therefore be very aware from the early stages of the negotiations, as to exactly what 

role each and every sub-contractor will play. If there is any chance that poor or non-performance 

by an outsourcing sub-contractor will materially affect the service then the 

client must investigate the sub-contractor to the same depth that it is hopefully investigating 

the prime service provider. 

The client must ensure that the service provider takes full responsibility for the work 

of the sub-contractor. The client should also ensure that it has the right to prevent any 

sub-contractor from providing goods or services to the organization if there is a perfectly 

reasonable cause for doing so. The client should also attempt to secure the right of replacing 

poorly performing sub-contractors. 

Size matters! 

Ask any large client organization if it would be willing to outsource a key function to 

anything other than a major service provider and the answer will invariably be in the negative. 

There are a number of sound and obvious reasons for adopting this view but even 

taken together they do not prove that client and service provider should be of a 

similar size, or that a small service provider could not do a first class job for a much 

bigger organization, if the circumstances were favourable. 

Most of the original IT outsourcing service providers such as EDS were already in 

existence as sizeable internal IT departments of major corporations. These internal 

departments were then re-invented as companies in their own right to take on a wider 

role to meet the outsourcing opportunity. Other early IT outsourcing service providers 

were often quite small organizations who just happened to have the right mix of skills at 

an opportune time. However, even these small providers were normally in a position to 

demonstrate that they had greater in-depth skills than the IT department that was being 

transferred to them.

72 


The early IT outsourcing market grew rapidly but sometimes not as quickly as some 

of the service providers might have wished. During slack times some of the big providers 

took on clients that they would now consider too small. A couple of years ago EDS 

claimed to have a number of satisfied UK clients in the £10,000 a year range. 

Presumably, the contracts having been in existence for a long time and both EDS and 

their clients must find the arrangements profitable. Nevertheless, it is difficult to imagine 

that any of the larger providers would normally go out of their way to obtain a £10,000 

per annum contract these days. 

‘Normally’ is the key word in the last statement because 

sometimes executives make decisions that they would not 

most major providers contemplate at other times. This frequently happens in the 

break their own rules outsourcing market when sales are down because anticipated 

major wins have failed to materialize, key existing 

on minimum contract 

size when it suits them contracts have unexpectedly not been renewed or someone 

is tantalizingly close to an end of year sales target and a 

lucrative bonus. Rules, they say, are made to be broken and 

most major providers break their own rules on minimum 

contract size when it suits them. 

Clearly, a large client organization will still be in a strong negotiating position even if 

it is outsourcing a small department. However, if a small or medium sized client with a 

relatively small area to outsource should be ‘lucky’ enough to sign a deal with a major 

provider because that provider has suddenly become desperate for an additional contract, 

the result will be difficult to forecast. 

Hopefully, the provider will treat small clients as well as it does the large clients and 

new clients as well as it does existing clients. But resources are always scarce, so guess who 

usually gets priority if a specialist is urgently needed at both a large client’s site and a 

small client’s site I accept that there might be exceptions to this natural law, but I doubt 

if there are many. 

If the last twenty-odd years of outsourcing experience has taught us any lessons, then I 

suggest that the following are amongst the most important. 

1 

It is essential in an outsourcing arrangement that key elements such as the 

Service Level Agreements (SLAs) are adequately written up in the contract 

because they provide the legal structure by which the provider’s 

performance can be measured. Nevertheless, even where the contract 

documentation has been found to be watertight from the client’s point of 

view, there have still been numerous cases where the provider failed 

miserably to reach the desired targets.


2 

3 

4 

Although some of these failures may have been due to simple incompetence, it 

has become apparent that the most common reason has been that at some 

stage the provider has become convinced that concentrating on other more 

lucrative contracts would produce a better return. Once that happens, it 

would appear that even the tightest of contracts can do little to safeguard the 

client’s position. 

For that reason, it is now believed that the wise client will build an element of 

risk/reward motivation into the arrangement so that there is always the 

opportunity that a special effort on the provider’s part will produce an 

adequate reward. 

Sadly, even these partnership arrangements have been known to fail and the 

reason put forward most often for this situation is that yet again the provider 

has found other, even more lucrative contracts. 

The question of size is therefore very important. Apart from owning or taking an equity 

stake in the provider, the best thing a client can do when entering into an outsourcing 

arrangement is to ensure that the continuation of their arrangement is always going to be of 

prime importance to the provider. I appreciate that this is easier said than done, but clearly 

it is much more likely to be achieved if the client is a key player with a provider who has a 

small number of clients, than if it is a small player with a provider with many clients. 

Different clients, different quality of service 

I would doubt if any long-term outsourcing service provider could honestly claim that all 

its clients were satisfied with the service they have been receiving. But then again it would 

be surprising if any established supplier of products or services could make the claim – it 

is in the nature of commerce that you cannot satisfy everybody. 

Nevertheless, some of the variations in performance by major outsourcing service 

providers have been most surprising when considered under normal business guidelines. 

Providers who have apparently produced excellent results for some clients in terms of 

service improvements and savings have followed this up with failures and then further 

successes and failures. 

As the world’s leading provider of IT and BPO services, it is worth looking at some of 

the deals EDS have been involved with. A few years ago they contracted to develop and 

build a Social Security system for the southern US State of Florida. Part-way through its 

first year of operation the system developed faults and then got progressively worse. The

74 


State officials made the decision to stop paying EDS, who they held responsible for an 

unacceptable bottleneck in dealing with claims and for the system paying out over $100 

million more than it should have done in benefits. EDS sued for non-payment, arguing 

that State officials had changed the system almost immediately it had been implemented 

and that as a result the amount of information that it needed to process was dramatically 

increased. More recently, EDS has provided more or less the same argument to explain 

why its outsourcing arrangement with the British Government’s Child Support Agency 

ran into difficulties. 

Politicians normally win office by promising changes and therefore, public sector outsourcing 

frequently carries the risk of disruption due to U-turns in policy. Nevertheless it is 

almost impossible to accurately apportion blame in these disputes because some changes to 

the required service are inevitable almost from the day the contract starts. From that point 

on even the most gifted arbitrator will find it difficult to estimate the extra degree of difficulty 

or disruption resulting from the change. EDS has a great deal of experience in dealing 

with the public sector. In recent years they have won contracts with a range of central government 

bodies in the UK, including the Inland Revenue, 

the CSA, the NHS, the Driver & Vehicle Licensing Agency, 

it would be 

unrealistic to expect 

every client to get 

the same quality of 

service, however hard 

EDS and other major 


might try to achieve 

that aim 

the DSS and a number of local authorities. EDS also provides 

similar services for government departments across 

North America and the Far East and has a similarly impressive 

list of private sector clients around the world. In fact, 

EDS has over 9000 clients on a global basis and they are the 

first choice of provider for many major clients, so they must 

be doing something right. Nevertheless, it would be unrealistic 

to expect every client to get the same quality of service, 

however hard EDS and other major service providers might 

try to achieve that aim. 

Getting involved in contract disputes can be a very 

expensive business, so it is normally true to say that few 

cases would end up in court if the result was a foregone conclusion, i.e. both parties must 

normally believe that they have a reasonable case for the dispute to get that far. 

Outsourcing disputes are no different from other contract disputes and decisions are 

sometimes in the balance until the very last minute. In fact, cynics will often argue that 

the decision would have different if another judge had made it, or the same judge had 

made it on a different day. 

On balance, I think most outsourcing advisers would apportion most of the blame 

for the average failure with the client. The provider typically has the experience to 

avoid making too many mistakes but it’s often all too new to the client and it is the 

client who usually introduces massive changes to procedures without having allowed 

for them in the contract.


Clearly, though, the service provider must be to blame for failure on some occasions, 

even though it may have been successful at around the same time for other clients. I 

believe, but I cannot prove it, that failure by one of these majors is most likely to happen 

because they have taken too much work on. 

I accept that it would be difficult to know when a provider who already has thousands 

of clients is taking on too much work. Nevertheless, over the years I have noticed that 

when major consultancy firms first adopt a service provider role they tend to underestimate 

the amount of work that is involved. In addition they are always trying to come to 

terms with the fact that far more non-fee earning time is necessary in obtaining an outsourcing 

deal than is ever likely to happen in a conventional consultancy assignment. 

This uncertainty has certainly led to some new service providers underestimating the 

time taken to pitch for new work in a competitive situation. In addition, of course, without 

previous experience they can sometimes only guess at the time and effort needed to 

bring about the transition, and if they get this horribly wrong there is a good chance it 

will never be put right. However, it goes much further than that. Even an experienced 

service provider can never be really certain how long the transition will take, as each new 

transition will not only contain unique elements but will be subject to varying degrees of 

helpfulness from the staff being transferred. The experienced service providers will probably 

be 10–15 per cent better in making such estimates but they can all get it wrong. Even 

the most experienced providers have known times when a major new client has been 

taken on just when problems have arisen unexpectedly with other existing clients’ work. 

As a result there will be a great deal of stressful travelling around by key staff to correct 

the problem, but such a situation will not bode well for the new client’s chance of getting 

good service at the first time of asking. 

I think some service providers are never quite sure why one outsourcing project is an 

out and out success and another is a complete failure. Whilst I am sure that taking on too 

much work is a major reason and that a sudden increase in 

problems across existing clients is another, the human element 

must also be a major factor. Transferring IT, finance 

or any large function to a service provider is a major act of 

faith. So much of it depends on the management skills 

available to the project. The programme manager and 

other key members of the provider’s staff may be experienced 

or inexperienced. They could be on the top of their 

form or suffering from depression or other illnesses. 

Similarly, the client’s staff may be depressed or ill or just 

bloody-minded. In short, the difference between a very 

successful and an unsuccessful transition may simply be 

the atmosphere permeating around the management team 

or the fact that a key executive is ill. 

in short, the 

difference between a 

very successful and 

an unsuccessful 

transition may simply 

be the atmosphere 

permeating around 

the management 

team or the fact that 

a key executive is ill

76 


If I were contemplating outsourcing a major function, I would pay special attention to the 

people the provider was putting forward to run the project. Are they experienced in the roles 

they will be playing If so, what success have they had If not, can we afford to take the risk 

on this occasion I would also examine the attitude of my own senior staff – those being 

transferred and those being retained. If these people were really negative it would be risky to 

let them play a key part in the transition. 

On a regular basis throughout the transition I would make it my business to study the 

atmosphere being created by the interaction of the managers and at the first sign of 

problems I would demand changes.

chapter 

7 

the process of choosing a 


What are your main reasons for outsourcing 79 

How do you find the right outsourcing service provider 81 

How many providers should you approach 83 

Developing the partnership concept 83 

Staff issues 84 

Finding a suitable provider by sole sourcing 88 

Usual reasons why sole sourcing takes place 89 

Other reasons for taking the sole sourcing route 92 

Using more than one provider 94 

Managing more than one provider 94 

Pre-contract work 96 

Some things a provider needs to know 96

the process of choosing a service provider 79 

What are your main reasons for outsourcing 

One of the first tasks facing the management team of an organization embarking on an 

outsourcing project is to establish what it wants from the arrangement. These days most 

managers are familiar with the three basic reasons for outsourcing put forward by the 

management gurus: 

● 

● 

● 

the desire to concentrate on core activities; 

the need to improve the service; and 

the often pressing need to reduce the cost. 

Virtually all the initial approaches to service providers concentrate on these three points 

and consequently receive little attention unless the potential client explains them in a 

convincing way. More importantly, an assumption that the reasons are well known and 

obvious may mean that the client management has failed to analyze its own special reasons 

early enough. 

Well before anything is sent to potential service providers, the client must establish 

what it really wants to achieve. Getting each of the senior managers of the function and 

the senior users to document their aims in order of priority is an excellent way of doing 

this. Even if a re-engineering exercise has recently been carried out, it still worth going 

through this exercise as it reinforces the question ‘What are we trying to achieve by considering 

this option’ 

It really is beneficial for the client’s negotiators to be absolutely sure of the main reasons 

for considering outsourcing. If the key reason is to turn the service into something 

that better matches the perceived current and future needs of the users, then the negotiators 

are aware that a value added improved service is paramount and this could mean that 

the cost factor is significantly less important. It is conceivable that the comfort of knowing 

cost cutting is not the key aim may result in the opportunity for the service provider 

to maximize the client’s competitiveness by creating a ‘Rolls Royce’ type service in the 

short term. Such an opportunity would certainly be lost if the service provider has any 

doubts about the client’s main aims. These doubts arise automatically in outsourcing 

because any experienced service provider will have numerous stories to tell of potential 

clients who claimed that their main aim was an improved service and then chose 

the provider submitting the lowest cost without considering the service quality. In a

80 


competitive tendering situation, therefore, the provider usually starts by looking for ways 

to keep the costs as low as possible. 

If a significantly improved service is paramount, it will be essential to stress this aim 

at every opportunity when writing to or talking to the competing providers in order to 

overcome any latent scepticism. However, emphasizing the need for an improved service 

need not reduce the opportunity for maximizing cost savings. A balance can be 

obtained by making it very clear that cost will only play a part in the decision should 

two providers submit equally attractive service proposals. All very obvious points, but it 

is surprising how often the client fails to communicate the real reasons for outsourcing 

to the service providers. 

It is possible that after a stringent internal review, management will decide that cutting 

cost is really the only issue. Decisions of this type have sometimes been made where organizations 

anticipate major short-term acquisitions or divestments. They conclude, therefore, 

that it makes little sense building for the future if the future is too uncertain to even make a 

guess at. In addition, they reason, if disruption is the only certainty in the near future, an 

organization with more specialists and the opportunity to use them over a wide range of 

clients is bound to be able to perform the service more cost effectively. In such circumstances 

the client is looking for a service provider who will probably carry on the function 

without making too many changes but who can make savings from better use of personnel. 

Outsourcing service providers invariably claim that their 

sole aim is to add value by using the latest technology to 

outsourcing service 

providers invariably 

claim that their sole 

aim is to add value 

by using the latest 

technology to 

dramatically improve 

each client’s service 

dramatically improve each client’s service. Nevertheless, for 

the vast majority of providers in functions like IT and 

finance, there will be many occasions when just taking over 

the service without the need to make significant changes will 

be a very attractive option. Clearly this will be the case 

where the provider is struggling to find the specialist 

resources to bring about improvements for other clients and 

where it sees the opportunity to share the new client’s service 

with that provided for existing clients. 

If the client is sure that its key reason for outsourcing is 

cost reduction then it will presumably want to limit the 

duration of the outsourcing contract. In such circumstances this ought to be made very 

clear to potential service providers from the beginning. In fact the fairest way for the client 

to deal with this type of arrangement is to provide a complete description of the function to 

be outsourced, including current costs, to a maximum of three service providers and see 

which one comes up with the best bid. Even then, the wise client will have made some preliminary 

overtures to establish a short list of potential service providers who are most likely 

to be attracted to such a deal at the time in question. A good way to establish this is to ask 

for permission to talk to some of their other local clients.


How do you find the right outsourcing 


Use an ideal provider profile 

First of all, it is essential for the client to draw up a profile of the ideal provider before 

contacting anyone. What type and range of specialist skills are necessary and in what 

quantity If the provider experienced any shortfall in numbers and quality of specialists 

once the project was underway, would you be willing for sub-contractors to be used Do 

you feel it is essential for the service provider of your non-core function to have worked 

for clients who are direct competitors in your core functions In other words, is it important 

that they understand your business What parameters do you wish to place on the 

size of potential service providers – does this refer to the total number of people they will 

put on your account or to the total number of staff they employ 

Invariably when you start to meet with potential service providers some of the parameters 

set will probably need to be adjusted, but it is still beneficial to do an ideal profiling 

exercise because it saves time and narrows the search. European public sector organizations 

are frequently forced to find outsourcing service providers by placing 

announcements inviting tenders in the European Journal. Even then it makes good sense 

to have completed this type of exercise before the potential providers respond. 

For most private sector organizations it is a question of finding out who the most suitable 

providers are and then approaching one or more. These days it is easy to find 

relevant service providers. A few minutes on the internet should uncover more than you 

would ever want to talk to. Before you contact a service provider it is obviously desirable 

to get as much information about the company as you possibly can to compare with your 

ideal profile. This will take a little more time but the information necessary to narrow the 

search is likely to be found on the internet. Quite often the service providers’ websites 

will contain snippets from articles they have featured in, statements regarding the areas 

they specialize in and, increasingly, case histories. 

It is therefore possible to isolate a significant number of service providers in this way 

and many will appear to be a reasonable match with the ideal profile set. This is 

inevitable as most providers claim expertise over a wide range of activities. 

Speak to existing clients 

Other sections of this book deal with pros and cons of dealing with just one or multiples 

of providers. But, however many providers you contact, it is a good idea to ask 

each of them for permission to speak to at least one of their existing customers about 

the service they are currently receiving. Service providers don’t enjoy being forced to

82 


make such introductions. Not all their clients will be happy with the service they are 

getting and there will be natural concern as to how many times you can keep bothering 

even the most satisfied of clients. Nevertheless, the service providers do accept that a 

potential client is contemplating a very risky venture over a relatively long period of 

time and is therefore justified in taking whatever steps it can to safeguard itself. 

Consequently, a good many potential clients do make these requests and the providers 

normally do their best to satisfy them. 

Not surprisingly then, the service provider’s ‘flagship’ clients often find themselves 

dealing with such enquiries on a very frequent basis. It is not unusual to find that these 

flagship clients are not necessary those receiving the best service, but the ones that have 

said the nicest things about the provider on previous occasions. In making such enquiries 

of an existing client it is well worth considering that the person you are talking to will 

normally be hoping for an ever improving service and will have few, if any, reasons for 

upsetting the provider, even if the service is not what is desired. 

Armed with such knowledge, some potential clients have approached the flagship 

client with very detailed written questions aimed at forcing a truthful answer. In my experience 

this does not usually work, as the flagship client makes excuses about sudden 

pressures of work and resorts to very brief and vague answers. 

It is usually better to adopt what will be seen as a softer approach. For example, if 

the first question is ‘Has the service provider matched its promises and your expectations’ 

the person expected to answer is already under pressure and will probably 

immediately paint the provider’s performance more favourably than was originally 

intended. After that, the person being questioned is very likely to go on giving the 

provider undue praise. On the other hand, if the first approach adopted the marketing 

intelligence reasoning by starting with a question such as ‘What would you change if 

you had to do it all again’ the threat largely disappears. Answering this type of question 

does not necessarily imply criticism of the provider and consequently the interview 

gets off to a pleasant start and the potential client has the 

opportunity to learn much more about the provider’s 

contact with the 

service provider’s 

existing clients is the 

best way to obtain 

information on the 

short- and mediumterm 

suitability of 

potential providers 

actual performance. 

It will be particularly important to devise questions 

aimed at the provider’s current workload. The provider may 

not have told the potential client that it has just won several 

major new contracts, which will all begin shortly, but that 

information will very likely have filtered through to the 

existing client’s internal management from contacts with the 

provider. Contact with the service provider’s existing clients 

is the best way to obtain information on the short- and 

medium-term suitability of potential providers.


How many providers should you approach 

For those clients intent on creating a competitive short list of service providers, the next 

question is: how many potential service providers is it right to deal with Anyone who has 

set up such a competitive situation will confirm that dealing with three or four providers 

on a preliminary basis still involves a great deal of work, and that the workload for the 

client is only marginally reduced if client adviser consultants are involved. Incidentally, if 

it is intended to use such consultants then it is advisable to involve them before any contact 

is made with providers, as they may have valuable information on the short-term 

circumstances affecting one or more of the providers. 

In most circumstances, two to three short-listed providers will be sufficient for any 

client’s needs, but this will depend to a large extent on the quality of the refining process 

used to create the short list. 

Developing the partnership concept 

Once the successful service provider has been chosen, the two parties will want to firm up 

the basis on which they are going to work together. Invariably these days one or other 

party will raise the subject of a partnership of some type early in the discussions. 

It is worth setting down what the partnership concept means in the outsourcing environment 

where a specific joint venture is not contemplated. 

● 

● 

● 

Both parties accept that a rigid contract would be too restrictive in their future 

relationship because they want to be flexible enough to maximize the opportunities 

that appear to exist. In effect they have identified in non-specific terms what they 

want to achieve but accept that the means of reaching the targets are not yet fully 

understood and in any case can only be reached over a period of time. 

That does not mean that a contract is not necessary at all. It is important that the 

original intent of the partnership is written down so that any key relevant individual 

can refer to it whenever this becomes necessary. 

In fact, a conventional contract is often used for partnership agreements, but is 

amended in areas that stipulate performance. For example, the service level 

agreement could still be included as a target to be reached or bettered. In the 

partnership agreement though, the typical minimum performance level might not be 

mentioned and could be replaced by a clause that simply urged both parties to do 

their best to achieve the desired results.

84 


● 

● 

Usually, a separate document is attached or included in the contract specifying both 

parties’ responsibilities in achieving the set aims. 

The partnership contract or agreement must spell out the targets that both parties 

have set whilst allowing flexibility for the provider to try alternative ways of reaching 

the desired goals. 

Staff issues 

When should you inform your staff of the potential outsourcing 

The usual answer to this question is to make the announcement as soon as you possibly 

can. Nevertheless, some common sense must be applied. 

The process of outsourcing complex non-core functions like IT and finance can take a 

very long time. The time taken from outsourcing first being considered as a serious option 

to the actual transfer date has been known to take a year or so, with the average being at 

least six months. These days at least 90 per cent of organizations which decide that outsourcing 

is the preferred option for IT, will outsource the function within a nine to eighteen 

month period. With other functions like finance and HR there is a greater chance that the 

client management will change its mind at some stage prior to signing a contract. 

In circumstances where the process is likely to take many months and is by no means 

certain to result in an outsourcing, the subject of when to inform the staff likely to be 

transferred is worthy of considerable thought. Although it 

may be morally correct for an organization to inform its 

although it may be 

morally correct for an 

organization to inform 

its employees of major 

lifestyle changes as 

soon as it is aware of 

them, this ought to be 

balanced against the 

uncertainty and 

dissatisfaction that a 

long period of waiting 

will create in the mind 

of the average 

employee 

employees of major lifestyle changes as soon as it is aware 

of them, this ought to be balanced against the uncertainty 

and dissatisfaction that a long period of waiting will create 

in the mind of the average employee. 

Those in favour of giving as much notice as possible 

will quote instances where junior staff have not been 

told that an outsourcing project was in progress and 

unfortunately made decisions to buy local property. 

Obviously anyone taking such a decision only to find 

that within months they had to relocate if they wanted 

to keep their job is likely to be upset. Those against, 

point to instances where all staff were told of the outsourcing 

possibility almost as soon as this option was 

first considered, but because it took many months to 

choose the provider a great many of them took the


opportunity to change jobs. Once the outsourcing option is raised, the identity, management 

and management style of the successful service provider is going to assume 

great importance to the functions employees. It follows, then, that as soon as the successful 

service provider is known, its management should be introduced to the client’s 

staff to allay their fears as quickly as possible. 

Sometimes it is deemed necessary for the provider’s consultants to visit the client’s 

premises in order to carry out some work that is essential to the outsourcing proceeding. 

The presence of a service provider’s consultants on the client’s premises might be disguised 

in the first instance as a normal consultancy assignment but it would add to any 

feelings of betrayal if it later became obvious that the consultancy had been the start of 

the outsourcing exercise. 

Logically, then, in most instances it makes sense not to inform the staff likely to be 

transferred until a preferred supplier has been chosen. If a competitive situation between 

service providers exists for any length of time and the client needs to allow access to 

senior staff in order to enhance this competition, then it is important that these meetings 

take place off-site. 

The importance of prompt briefing and comforting of staff 

From the moment that outsourcing becomes the preferred option, the client should 

immediately start working on the detail necessary to inform the staff and bring about a 

smooth transition. In this the client can and should look for assistance from the shortlisted 

providers because previous experience of transitions will be invaluable. 

In any outsourcing, the main factor in securing a successful service delivery will be the 

attitude of the staff, both those retained and those to be transferred. It is, therefore, 

important to maintain goodwill between the two groups of staff and reduce the worry 

and uncertainty time to an absolute minimum. Whatever efforts are made to inform and 

comfort those concerned, strong feelings of resentment and betrayal will linger with all 

staff, particularly those who are being made redundant, unless something special is done 

to compensate. 

It is extremely important not just to inform the employees, but to treat and help them 

to an extent that has probably not been deemed necessary before. Looking at it purely 

from the client’s and provider’s points of view, it is of paramount importance to provide 

first rate assistance to any staff who are immediately being made redundant. Ignoring the 

moral grounds for treating staff well, it is essential to be seen to be concerned, both 

because the people being transferred may judge their own future treatment on what they 

see and hear during this time, and because some of those being made redundant may be 

required to work on during the transition period on a contract or incentive basis. 

Given the tension that the employees will experience it is advisable at least to consider 

the following steps and actions.

86 


1 

2 

3 

4 

5 

6 

7 

8 

The client should outline its own strategy from the time outsourcing becomes 

the preferred option. ‘How would I both expect and wish to be treated’ is a 

good starting point. 

The client and successful provider must agree a strategy for dealing with the 

staff, particularly those who will be transferred, and this will ideally be done 

prior to the announcement. 

It is important for the successful provider to meet with the client’s human 

resource management to understand the issues that will need to be addressed 

quickly in respect of group and individual terms and conditions, trade union 

involvement, etc. 

It will be important to bring together all the necessary information to be able 

to agree each individual’s future terms and conditions as soon as possible to 

avoid unnecessary arguments later. 

As soon as the initial announcement has been made, firm dates should be given 

to each affected employee as to when they will receive one to one and probably 

group opportunities to communicate with representatives of both existing and 

future employers. These meetings should be carried out as quickly as possible. 

The period immediately following the announcement will be an 

uncomfortable and traumatic time for the employees and it is likely that each 

person to be transferred will initially seek to direct most questions at their 

existing management, but gradually they will become more interested in 

talking to their future employers. In order to answer employees’ questions to 

the satisfaction of all concerned, it will be desirable for the provider’s 

representatives to be aware of sensitive information such as terms and 

employment conditions, even though the contract will not be in place. 

In view of the emotional stress likely in the short term, both parties must 

make themselves available whenever possible, and commit as much 

information as possible to writing so that unnecessary problems do not arise. 

For example, after the announcement of an impending outsourcing, rumours 

often start to spread that a relocation or further relocation will be required in 

the short term. Therefore, if this is not contemplated, it would be advisable to 

counter any possible concerns by the provider putting in writing its intentions 

regarding the location issue. 

Most of the large service providers claim that they view their initial contact 

with their new employees with such concern that they use well trained and


sensitive human resource specialists in these first interviews, which are treated 

as counselling sessions. The concerned client would be advised to get an early 

indication of exactly what the provider is going to do in this area. 

9 

10 

Most providers will wish to introduce their own general terms and conditions 

of employment into the discussions as early as practicable in these initial 

counselling sessions. Experience indicates that the sooner this area of 

uncertainty is removed, the better the employees’ reaction will be. However, 

the service provider may not wish to finalize individual terms during a first 

meeting. This may be due to uncertainty about the individual, or the group 

terms may not have been finalized. The client should either ‘sit in’ on the 

provider’s discussions with staff to be transferred, or counsel selected members 

of the staff immediately after they have been involved in one to one sessions 

with the provider. If the client feels that the provider has not done enough to 

allay unnecessary fears then it should push for additional action on this point 

to be taken as quickly as possible. Client management should be aware that 

they are likely to be blamed for all problems that occur prior to the transition 

being completed. After all, they decided to outsource. 

In further (probably group) sessions, the provider will wish to go into more 

detail regarding initial induction training (to explain operating systems and 

working practices), further individual and group training plans, career 

development and personnel policies. Again, it is in the client’s interest to make 

sure all these actions take place. 

A first class service provider’s overall aims during these initial contacts will include: 

● 

● 

● 

● 

gaining an understanding of each individual’s personal aims and aspirations and the 

‘culture’ they will be moving from in order to minimize the prospect of these issues 

being badly handled and resulting in a reduced service; 

creating the impression that by moving to the new organization, the employees’ 

skills, experience and expertise are more closely related to the core activities than was 

previously the case, and that consequently opportunities for career development and 

enhancement will be markedly increased; 

the settlement of all employee matters as quickly as possible, particularly with the 

managers who will be transferring, as they will have a key role to play if the new 

service is to meet expectations; and 

creating an atmosphere whereby the transferred staff are pleased that the transfer is 

about to take place and are looking forward to this new stage in their careers.

88 


the important thing 

to remember is that 

despite the very best 

intentions and 

support from senior 

management, the 

outsourcing will not 

be a success if there 

is not a reasonable 

degree of support 

from the staff 

The important thing to remember is that despite the 

very best intentions and support from senior management, 

the outsourcing will not be a success if there is not a reasonable 

degree of support from the staff. It will be important to 

communicate the benefits of outsourcing from both the 

organization’s and the employees’ point of view. One further 

point is worth making on the subject of counselling staff. 

Some client organizations have been known to stress the 

benefits of outsourcing too strongly, with the result that staff 

the client intended to retain in house have ‘jumped ship’ 

either to the provider or some third party. 

Should you allow the internal staff to make 

a competitive bid 

Clearly, if an internal team is going to be allowed to bid then they should probably be 

given some advance notice to compensate for the lack of experience in mounting such 

competitive bids. However, it should not be too advanced, as there is a chance that the 

time will be used to block the competition and the external providers must feel that they 

have a reasonable chance of success. Apart from this extra time, it is essential that as far as 

possible, all bidders believe they are performing on a reasonably level playing field. 

Finding a suitable provider by sole sourcing 

The number of outsourcing deals that have been put together as a result of single tender 

or sole sourcing arrangements is variously estimated to be anywhere between 25 and 

60 per cent of the total for all deals. Whatever the true figure, it is, on the face of it, quite 

extraordinary that any client organization should not bother to take advantage of competitive 

advice, ideas and quotations when making a very important outsourcing decision. 

A number of service providers and consultancies such as Unisys, argue that sole sourcing 

is good for the client and give reasons such as the following. 

● 

● 

● 

Saving time and money are two of the main motives for outsourcing, and when a 

customer selects a single vendor to perform a service instead of going out to 

competitive bid, even more time and money is saved. 

Sole sourcing can increase the control an organization has over the outsourcing 

process and adds value to the situation. 

Sole sourcing shortens the procurement cycle.


● 

● 

Sole sourcing reduces procurement cycle costs. 

The alternative request for proposal (RFP) process has become extremely costly and 

time consuming. 

Without doubt, there are organizations whose need to outsource is so pressing that they 

probably do need to avoid the time taken in setting up a competitive situation. It is 

equally true that the time taken to organize a competitive base via a RFP is normally 

much too long and is frequently ludicrously expensive. However, advocates of full competition 

will justifiably argue that the client organization is going to get much more control 

over the outsourcing process by creating a competition. They will also be quick to point 

out that sole sourcing runs the risk that there is no obvious second provider to fall back 

on if the deal with the first choice company falls through. 

It may be that some client organizations have made a deliberate decision to save time 

and cost by going the sole sourcing route. In most cases, though, sole sourcing appears to 

happen from a variety of ‘accidents’. 

Usual reasons why sole sourcing takes place 

Once outsourcing has been accepted as a serious method 

of improving performance, the client’s management team 

must work out how best to investigate this option and they 

must do so in circumstances requiring a high level of security. 

In all probability they will deem it an essential first 

step to talk to at least one trustworthy individual who can 

shed some light on the subject. 

The auditor’s involvement 

Quite naturally, many organizations have approached the 

contact partner at their auditors to fill this role. Apart from 

knowing the client’s business very well, an audit partner 

may be working for a firm that is a potential service 

provider or supplies outsourcing consultancy advice. If the 

auditing firm does provide either of these services, the 

client may hope that they can gain access to valuable information 

without divulging their identity. 

In making this assumption, client management will 

once outsourcing 

has been accepted 

as a serious method 

of improving 

performance, the 

client’s management 

team must work out 

how best to 

investigate this 

option and they 

must do so in 

circumstances 

requiring a high level 

of security 

have reasoned that the partner concerned will not want to lose the audit and will therefore 

not risk directly involving any other part of the firm until the client gives permission

90 


to do so. In addition, knowledge that the auditing firm cannot be both auditor and service 

provider for the finance function may have convinced some managers that an 

approach to the audit partner will be totally risk free. 

Whatever the logic behind the approach, a significant number of outsourcing arrangements 

for both IT and finance have started with the introduction of the audit partner, 

and some of them have become sole sourcing deals with other parts of the partner’s firm. 

There is no suggestion of wrongdoing here. Few audit partners will want to lose an 

important audit, but once a partner has exhausted his or her pot of knowledge, it is natural 

for that partner to point out that experts exist in other parts of the firm. A meeting of 

interested parties is arranged, after which, events take their natural course. 

From the major accountancy-based firms’ point of view, the potential rewards from 

being an outsourcing service provider are massive for both IT and finance when compared 

to what can be obtained from auditing. For that reason, many of these firms have 

already taken a decision at the highest level to give up the audit if necessary, if an outsourcing 

opportunity should arise. 

An organization that begins sole sourcing discussions with its audit firm prior to talking 

to anyone else can put itself at a disadvantage, even where the finance function is not 

a candidate for initial outsourcing. The potential client must accept that it will be difficult 

for any other bidders to be equally briefed without going to a great deal of effort and 

without passing out even more sensitive information than would otherwise be necessary. 

The client may be prepared to do this, or may decide that it does not matter if the audit 

firm does have more information than the other potential service providers. 

Unfortunately and for obvious reasons, the other service providers will see themselves at a 

considerable disadvantage in this arrangement. 

Approaching just one service provider 

Many organizations contemplating outsourcing a major function take ‘the bull by the 

horns’ and as a first step, contact what they take to be the most likely service provider. 

Naturally, they explain that, as yet, outsourcing is just one of many options and in order 

to take the matter further they would like to know what information the provider needs 

in order to put a price on meeting a specified service level. The provider reacts by stating 

that it would need to understand not only the transaction details but also how the various 

processes fit into the client’s overall strategy and the real level of service that is required 

for the medium and long term. The provider will argue, with every justification, that this 

is best done by a series of exploratory meetings with the senior and middle managers, 

during which time the detail necessary to make a bid will be extracted. 

In many sole sourcing arrangements the client’s original idea behind talking to the 

service provider was to obtain the basic information necessary to produce a Request for 

Proposal (RFP). The provider’s insistence that it will be necessary to talk at length with


the client’s middle management before any meaningful estimate of service and costs could 

be made, appears to have typically resulted in the following line of thought. 

● 

● 

● 

● 

● 

We know our business is complex, therefore this service provider is correct, it will 

obviously need time studying transaction details and talking to our staff – we could 

not expect it or any other provider to make a bid based simply on an RFP. 

Ideally, we do not want to give sensitive information of this type to any outside 

organization, so we certainly must not give it to more than one. 

If we give the service provider the amount of detail necessary to make a sensible bid, 

how can we do it without also giving it a good idea of what the service currently costs 

If we cannot disguise what the current service costs are, then that surely removes 

much of the reason for trying to create a competition. 

We want to delay upsetting the staff for as long as possible, why create a long period 

of unrest for nothing if we eventually decide not to outsource. We can, therefore, 

really only achieve our aim of pursuing the outsourcing option but not upsetting the 

staff by dealing with one provider on a very careful step-by-step basis. 

Every organization contemplating outsourcing should 

accept that it starts from a disadvantageous position when 

compared to the service providers it will be negotiating 

with. Even if it has previous outsourcing experience available, 

it may not have outsourced the function in question 

before. Compared to that, the service provider will have a 

great deal of information on what constitutes best practice 

for that function. 

A service provider that has been operating for a number 

of years may have worked with hundreds of clients carrying 

out the same function. Inevitably each new assignment adds 

to the collective wisdom of the provider. In addition, the top 

providers will seek out best practice information on a regular 

basis by way of benchmarking and other exercises. In this 

way they will almost always be able to find existing ‘evidence’ 

allowing them to make an indicative bid, based 

almost entirely on the potential client’s transaction information. 

every organization 

contemplating 

outsourcing should 

accept that it starts 

from a 

disadvantageous 

position when 

compared to the 

service providers it will 

be negotiating with 

Not having the same level of best practice information means that the client organization 

will not be able to estimate the real value of a bid made on a sole sourcing basis. If 

such a bid offers the client a 20 per cent saving, it may disguise the fact that the provider 

is able to provide the service at less than half the client’s current cost and is making a substantial 

profit. In a competitive situation, a serious bidder could not be certain of the level

92 


of other bids and consequently would be inclined to keep the price as low as possible. It is 

likely, therefore, that the client would have obtained significantly greater savings from a 

competitive situation. 

Organizations start from a similarly disadvantaged position in all commercial dealings 

with specialist suppliers, but overcome this situation by creating competition for the work 

to be carried out. The problem with outsourcing is that it appears to be very difficult to 

create the necessary competition without risking staff disruption and giving too many 

people sensitive information. 

Other reasons for taking the sole sourcing route 

Some substantial outsourcing arrangements have started on a small scale, possibly with an 

IT facilities management contract and then graduated to a full outsourcing as a natural 

result of the provider doing a good job. 

Other outsourcings have resulted from consultancy assignments where because the 

consultant’s people detailed the advantages and the path to follow to outsourcing, and 

because the consultancy was also an outsourcing service provider, it appeared neither fair 

nor logical to involve competitors. This has been particularly true where the opportunity 

for a joint venture between the two parties has been isolated. 

Many organizations that have chosen the sole sourcing route will nevertheless claim 

that they had gone through a competitive process by asking a number of service providers 

to make general presentations. However, a ‘beauty parade’ of service providers which does 

not result in competitive bids because the client is reluctant to give all the service 

providers the necessary information, cannot really create the correct level of competition. 

Some organizations have confused themselves by believing that because they find the 

function difficult to bring under control, then it must be too complex to explain in an RFP. 

The irony is that the service providers usually only require the most basic of transaction 

details in order to submit a bid, because they base their calculations on best practice and 

their own past experience of what is involved in the client’s transactions and processes. 

The service provider obtains many advantages from being chosen in a sole sourcing 

arrangement, including saving the significant costs involved in a competition. The benefits 

are such that given any opportunity for a non-competitive business deal, the provider 

will make every effort and excuse to get in quickly to talk to the potential client’s staff. 

They know that if they get in and are able to stay in for any length of time, the less likely 

it is that the client will want to go through the same exercise with anyone else. 

Sometimes the client’s management starts off with a great deal of faith in one provider 

and readily adopts the view that they either outsource to this provider or they don’t outsource 

at all. However, even then they should not discard the competitive process


altogether because they may be approaching this ideal provider at a point in time when it 

has little or no reason to offer anything but the smallest margin. This can happen when 

they have a surfeit of work in the outsourcing area or where they are under extreme pressure 

to meet targets for other clients. 

However logical the sole sourcing approach may appear 

at the time, there must be a risk that the client finishes up 

paying a higher price than it would have done if it had created 

real competition. 

The client may not have told the provider what the 

service was currently costing and did not provide any 

information on staffing levels. The client may hope that as 

a result the provider will have to keep its price as low as 

possible to be sure of offering an improvement on the current 

situation. There are two main snags with this 

reasoning. The first is that, once two or three of the client’s 

middle management have been interviewed for as little as 

15 minutes, there is a very strong chance that the provider 

will have a good idea of the staffing levels, even though no 

however logical the 

sole sourcing 

approach may appear 

at the time, there 

must be a risk that 

the client finishes up 

paying a higher price 

than it would have 

done if it had created 

real competition 

individual manager will remember giving anything away. The second is that the provider 

will make its own estimates based on best practice information and will still do so even if 

it has been given the costs and staffing levels to start off with. 

Once the provider has studied the client’s transaction details plus any reporting analysis 

work that is also part of the arrangement, it will compare this against what it believes 

is possible after it has re-engineered the service and has completed any other necessary 

changes. Typically, it will separate the cost of new systems and other transition costs for 

these to be paid when necessary by the client. It could be argued that these transition 

costs would most likely be lower if real competition played a part. 

The share of the anticipated savings that the providers offer the client will depend on a 

number of factors, including how important they value the client in question, how much 

they need the work and has competitive the situation is. For that reason a client who only 

deals with one provider is unlikely to save as much as one who has created real competition 

amongst several providers. If, for example, the provider not facing competition can 

see that costs have been outstripping inflation and then is able to get confirmation that 

this factor is the main reason for outsourcing, there is no reason to offer a competitive 

price. It may be sufficient, in terms of winning the business, to offer a constant price for 

each of, say, five years at more or less the client’s current cost level.

94 


Using more than one provider 

There has been a steadily increasing trend amongst major client organizations to split the 

overall IT function into sub-functions that can be operated and managed separately by 

outsourcing service providers. The stated objective of some of these organizations is to 

obtain the best specialist suppliers for each sub-function. Others have taken this route for 

defensive reasons, which include not committing everything to one external supplier and 

the belief that outsourcing in this way makes it easier to take the service back in house 

should it become necessary. From a contractual point of view it is certainly possible to get 

just as good an exit strategy built into an arrangement with one provider as it is with 

many. Nevertheless, for most executives, it still ‘feels’ easier to consider exiting if the IT 

outsourcing arrangement has been split up. 

I know of no hard evidence in terms of service benefits or cost savings, in favour of 

using either a single provider or multiples of providers. The evidence probably already 

exists but it’s certainly not surfaced for reasoned examination so far. As yet, the single 

versus several providers question has been mainly confined to IT outsourcing and will 

probably be confined to that function. It will probably also be confined to the very large 

clients because the service providers will not go to the trouble of co-operating with other 

providers if the deal and prestige factors are less than top drawer. 

Logically, clients outsourcing only a portion of the IT infrastructure, e.g. desktops, 

will only use a single provider. If the outsourcing arrangement includes a range of components 

that are capable of being managed and operated separately, e.g. desktop, helpdesk 

and data-centre, then the multiple provider approach has more credibility. 

Those in favour of multiple supplier deals will often point to the increased chance of 

getting real specialists working in each key area. Those against argue that splitting the 

function into two or more parts is bound to reduce the service level and savings obtained 

because each individual contract is that much less attractive to the providers. 

Managing more than one provider 

There is also the key question of how you manage the arrangement. In its much publicised 

mid 1990s IT outsourcing, BP Exploration claimed to have solved this problem by 

appointing three specialists on a worldwide basis, with each provider looking after the 

same specialist area all over the globe. In addition, however, the BP Exploration world of 

operations was split into three groups: North America, Europe and the rest of the world 

and each of the three providers was given control of the operation in one group. In that 

area the provider was made totally responsible to BP Exploration for the performance of


the other two providers. Obviously, an arrangement of this type will necessitate the existence 

of a prime contract and very clearly defined sub-contracts. 

Unless the client makes one service provider responsible for all the IT activities in one 

group or at one site, it will need to create a set of separate contracts and some form of cooperation 

agreement between itself and all the relevant service providers. Clearly, the 

advantages of making one provider responsible for the service normally outweigh the disadvantages. 

Having to negotiate with several providers to solve a problem will be difficult 

if there is any chance of the providers being able to transfer blame to others. It is sometimes 

argued that in law putting one provider in overall control will limit the client’s 

ability to deal on a day-to-day basis with the other providers. But in practice it is a relatively 

simple task for the client to build this requirement into the contract. 

The main provider will obviously take on the difficult task of managing the other 

providers on the site. This will have to be paid for as an extra in the contract but it could 

be argued that this fee will probably be less than the cost the client would incur trying to 

manage all the providers separately itself. 

However, even where one provider has ultimate responsibility 

for the actions of other providers and minor 

sub-contractors on a site, it would be very unwise for the 

client to ‘leave them to get on with it’. A client that has 

based its choice of providers on the ‘best of breed’ basis will 

need to consider other factors before it can hope to achieve 

its aims. For a start, service providers will not be overjoyed at 

the prospect of working closely with competitors. You may 

have chosen the providers on a ‘best of breed’ basis but the 

likelihood is that all the providers will supply the full range 

of IT services for other clients. They will also see themselves 

competing in the future for both full and part IT outsourcings. 

Not an ideal basis on which to expect them to 

co-operate fully and swap sensitive information. 

even where one 

provider has ultimate 

responsibility for the 

actions of other 

providers and minor 

sub-contractors on a 

site, it would be very 

unwise for the client 

to ‘leave them to get 

on with it’ 

If the PR handouts are to be believed, then there is some evidence that a prime service 

provider can manage the day-to-day running of a multiple provider operation perfectly 

adequately and cost effectively for the client. Nevertheless, if the system fails, the client 

had better be prepared to find out the source of the problem by itself. Was it really a software 

problem or was it something else Then, when the guilty provider is found, how do 

you compensate the others Should you compensate the others 

Given all the various possibilities it would appear likely that for a very large client 

there may be initial cost benefits in the ‘best of breed’ approach, i.e. the overall cost of the 

total IT outsourcing may be less if it is split up in this way. Nevertheless, I would expect 

that in the majority of cases and over time the cost of managing inter-provider disputes is 

likely to outweigh the initial cost advantages.

96 


One thing is certain – appointing a prime service provider to manage the activities of 

other providers may sometimes work well on a day-to-day basis, but it removes none of 

the client’s need to manage the overall function – if anything it may require more management 

activity. 

Pre-contract work 

It is not unusual for the provider to suggest some pre-contract work. Cynics would argue 

that providers have two very good reasons for making such a suggestion. These are that 

the exercise will provide consultancy fee income; and that the presence of the provider in 

the client’s premises will minimize the chance of a competitor getting in, even if both parties 

are keen to disguise the fact that the work is associated with outsourcing. 

It follows then that in most instances it would be wise for the client not to agree to 

such work until its management has decided upon its chosen service provider. 

Pre-contract consultancy can sometimes be justified where the client is very concerned 

about the risks involved. In such circumstances the client’s senior management may feel 

that any additional cost (for much of the work would need to be done anyway if the contract 

goes ahead) is well justified. 

If pre-contract consultancy is agreed upon, then typically, it will cover: 

● 

● 

● 

the documentation of existing systems at all relevant sites in order to confirm the 

final design of systems for the outsourced services; 

a risk assessment to identify major areas of potential failure or delay in both service 

delivery and any new systems implementation contemplated; and 

the production of detailed specifications for each function to be transferred and, if 

relevant, a detailed systems implementation plan. 

Some things a provider needs to know 

Experience suggests that outsourcing service providers often fail to understand what 

potential clients are looking for when they originally begin a search for a provider. In particular, 

they fail to understand that the client will probably be looking for different things 

at different times in the negotiations. For example, when first creating a short list of 

potential providers, the client will probably consider the following factors in descending 

order of priority.


1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

Credibility – how much experience does the provider have, i.e. how many 

existing clients 

Reliability – does the provider satisfy its clients’ needs 

Flexibility – does the provider work to only one set work pattern, or is it 

flexible enough to match our needs in the short term and adjust further if our 

business grows substantially, or declines 

Skill base – does the provider have the IT and other skills that we may not 

need now but probably will later 

Potential savings – will this provider be able to offer greater or lesser savings 

than others 

Service – how will this provider’s service compare with what we currently enjoy 

or what others might provide 

Management skills – if our business grows or contracts, does the provider have 

the management time, skills and desire to support our needs 

Personnel policy – what is the provider’s personnel policy and how will this 

affect our people 

Transition skills – how effective have they been in bringing about past 

transitions: have they met the required timescales and what has been the effect 

on previously transferred staff 

Contract questions – will the provider want to use its greater experience and tie 

us down under a tight contract, or will it allow us a ‘get out clause’ or 

partnership arrangement 

In-house expertise and control – will the provider make sure that we do not lose 

the expertise and control necessary to maintain and develop the business 

It could be argued that the above list is in the wrong order, i.e. that the service is the most 

important issue, followed by the potential savings, etc. Indeed, in the final stages of most negotiations 

these are the issues on which the decision is normally based. However, in the very early 

stages of choosing potential providers it is usually only the first four ‘concerns’ that are important. 

In other words, it is only the client’s perceived impression of the potential provider’s 

credibility, reliability, flexibility and skill base that decides whether that provider gets to the 

negotiating table. Once the short-list stage is reached, though, these four factors are usually 

taken for granted and consequently play a less important part in the final decision.

98 


Credibility, reliability and the skill base are factors that the service provider either has 

or does not have in the required amounts. It is normally sufficient, therefore, for the service 

provider to understand their special importance in the early stages of negotiations and 

to adjust its marketing accordingly. The flexibility factor is worth expanding a little further. 

The short-term flexibility concerns for most clients are based on issues such as: 

● 

● 

● 

we are not sure whether it is in our best interest for the work to be done in the 

existing premises or for it to be done elsewhere; 

we are not sure whether we will ask the service provider to keep at the end of the 

transition, 100, 50 or 0 per cent of the staff currently employed; 

we will probably want to retain the existing systems, but then again, we might ask 

the provider to transfer them to its own systems or create new systems. 

It is not unusual for potential clients to request this level of flexibility in the early stages. 

In one case, a provider refused very early on to say that it would retain all the staff who 

wanted to be transferred for at least six months after the transition. This refusal was a 

factor in the provider being dropped from the short list, but the remaining provider managed, 

without too much trouble, to make 20 per cent of the client’s staff redundant by 

the end of the transition. 

Naturally, the more flexible you are, the less profit you make. However, the point I am 

trying to make here is that flexibility is usually very important to the client during the 

initial discussions and very often the provider fails to pick up the emotional signals being 

generated. It is wise to state that ‘all these solutions are possible’ unless, of course, they are 

not. One major supplier claims total flexibility but usually all their clients get offered 

more or less the same package in the early stages. If a service provider is prepared to be as 

flexible as possible then it would be wise to raise this issue with the potential client at a 

very early stage.

chapter 

8 

potential drivers of outsourcing 

Improved cash-flow 101 

The need to relocate 101 

Non-competitive systems 102 

Consolidate the latest 

improvements 102 

Release scarce resources for 

other areas of business 103 

Strategic reasons 103 

Risk reduction 103

potential drivers of outsourcing 101 

Improved cash-flow 

Sometimes the service provider will be obliged to pay for assets that are transferred from 

the client. Payments have frequently been made to cover property, computer hardware 

and other related equipment, software licences and transport. The logic behind this 

arrangement is that the provider then uses these assets to provide the agreed or part of the 

agreed service. Less frequently payment has been made (usually quite small) for items 

appearing under headings such as ‘Goodwill’. Typically this occurs when the provider 

takes the asset but has little or no use for it. In effect both parties accept that new 

improved assets will be necessary very early on in the arrangement. 

In some outsourcing arrangements an injection of cash is just another benefit to the 

client. In others, however, the outsourcing deal appears to have mainly come about 

because of the client’s need for new short-term funds. 

The need to relocate 

A primary driver for many early IT outsourcing deals has 

been the need to relocate. For many organizations the 

1980s was a time when internal IT departments grew rapidly. 

Very often these IT departments grew at a much 

greater rate than all the other functions in terms of 

employees and demands on resources. 

When the time came to seek out new premises, the 

senior IT executives often found it difficult to justify their 

excessive use of scarce resources and were frequently 

a primary driver for 

many early IT 

outsourcing deals 

has been the need to 

relocate 

unconvincing in their estimates of future requirements. Given such circumstances it is 

not surprising that management sometimes took the safe way out and outsourced.

102 the outsourcing dilemma 

Non-competitive systems 

During the latter part of the 1990s, the single most important reason why organizations 

began to consider outsourcing the finance function was the impending need to change the 

financial system. When the heavy cost of such an implementation is added to the disruption 

caused, it tends to concentrate the corporate mind. Analysis of past lack of success in 

financial system implementations was then sufficient reason to consider alternatives. 

Knowledge that some outsourcing service providers have made substantial investments 

in the necessary technology and can claim extensive recent implementation experience with 

relevant systems is normally sufficient to spark the initial interest. Typically the client organization 

attempts to cost out the various options open to it under headings such as: 

● 

● 

● 

● 

do the implementation work ourselves with just the help of the successful software 

vendor’s people; 

as above but use additional consultants; 

just outsource the creation and implementation of the new system to either a 

consultancy or an outsourcing service provider, i.e. indulge in ‘Transformational 

Outsourcing’. This assumes that the client’s staff would continue with their existing 

tasks, leaving the third party to develop the new system, largely to their own design. 

On completion, the new system is simply taken over by the existing staff. At no stage 

is there a transfer of employment; 

begin a full outsourcing arrangement. 

Consolidate the latest improvements 

Whatever the perceived level of success, the completion of a performance improvement 

project will normally mean that the function concerned is very unlikely to be considered 

a prime target for outsourcing in the short term. However, a number of enlightened 

organizations have taken the opposite view. Their reasoning is as follows. 

● 

● 

● 

● 

What we have just achieved is the best we can do. Therefore it is the right time to 

consider outsourcing, as we know what it costs us to provide a given level of service now. 

By outsourcing now we will not be giving the service provider easy savings. 

We are unlikely to keep this function continually up to date and therefore in perhaps 

just a few short months the systems will become less efficient and less productive. 

If we can find a world class provider, now is the right time to consider outsourcing.

potential drivers of outsourcing 103 

Release scarce resources for 

other areas of business 

Competition, market changes and ever changing technologies have caused many functional 

heads and their senior staff to be almost permanently engaged on so-called ‘fire 

fighting’ exercises. In theory, outsourcing should free much of this management time for 

more creative work. 

Strategic reasons 

Some organizations have made the strategic decision 

to concentrate all or most of the resources available 

on core functions. In such circumstances outsourcing 

becomes almost inevitable. Outsourcing allows an 

organization to focus on its core business by transferring 

operational functions to an external specialist. 

outsourcing allows an 

organization to focus 

on its core business 

by transferring 

operational functions 

to an external 

specialist 

Risk reduction 

The accelerating rate of change means that each and every investment an organization 

makes becomes ever more risky. Competitive activity, technology and legislation can all 

change overnight. 

The outsourcing service provider is subject to the same risk but this can be significantly 

reduced when the investment is made for and spread over the work carried out for 

a range of clients. 

Outsourcing can produce its own unique risks. Nike, the owner of the sports shoe 

brand, developed a strategy for outsourcing the manufacture of its shoes. Over a period of 

time, more and more production was centred on plants in Asia. After the usual initial 

teething troubles, they started to get satisfactory product at a relatively low cost. 

Then Nike started to get a bad press because of alleged ‘sweatshop’ conditions in some 

of the Asian plants. The company was eventually compelled to cancel contracts with four 

factories in Indonesia. The reasons given for these cancellations included paying lower 

wages and providing poorer working conditions than the agreements stipulated. 

This illustrates the need in all outsourcing arrangements for the client to make sure it 

fully understands what the service provider is, or is not, doing. In many cases insisting on 

regular access to all the provider’s relevant sites is the only way to achieve this aim.

chapter 

9 

risks and concerns for both parties 

The client’s perceived risks 107 

The client’s concerns 109 

The service provider’s pre-contract 

risks and concerns 112

isks and concerns for both parties 107 

The client’s perceived risks 

During the early outsourcing discussions it is only natural for the client’s management to 

have serious doubts about the desirability of transferring key business areas to a third 

party. Some of these doubts will be viewed as real risk areas, others will be seen as relatively 

vague concerns that may or may not come to represent a real problem. 

What do we do if we want to take the service back 

The answer, as far as there can be an answer, is to build an exit strategy into the contract. 

The exit terms open to the client will depend to a very large extent on its own negotiating 

power and how keen the service provider is to secure the business. 

Any worthwhile exit strategy will need to put the client 

back in a position to carry on the business without disruption. 

Therefore, if the people, equipment and property have 

been transferred then the exit strategy should either allow for 

them to be transferred back or alternative arrangements 

made. Both parties need to be particularly careful where 

property is being transferred if the provider is intent on 

using the site for other clients’ business. It is also worth stating 

that even where the contract allows for the return of the 

staff, the chances are that they would prefer to remain with 

the provider and as a result some disruption might result. 

What happens if the service provider is taken over 

or merges with another company or goes bust 

any worthwhile exit 

strategy will need to 

put the client back in 

a position to carry on 

the business without 

disruption 

Any client organization considering outsourcing its finance and accountancy to a 

member of the Big Five must give this matter serious consideration. No one expected that 

the recent merger between Price Waterhouse and Coopers & Lybrand that formed 

PricewaterhouseCoopers was going to be the last example of consolidation between this 

group of large firms. But few outsiders really expected the sale of Ernst & Young’s consultancy 

division to Cap Gemini to take place and at the time of writing several others of 

these large firms are considering splitting off their consultancy operations.


We used to argue that the worst scenario in outsourcing finance would occur when the 

client’s service provider merged with their audit firm. In this eventuality the client would 

either have to find a new service provider or a new auditor and for reasons stated elsewhere, 

it is reasonable to expect the accountancy firm to offer to give up the audit in such 

circumstances. However, if the Ernst & Young example becomes the norm, then this 

potential problem would disappear because it is invariably the consultancy divisions of 

these large firms than provide the financial outsourcing services. 

The major IT service providers such as EDS and CSC are all growing quickly and 

many have been in acquisitive mode in recent times, particularly in buying firms of consultants. 

In the circumstances it would be surprising if further mergers and acquisitions 

involving them did not take place in the near future. Generally speaking, the outsourcing 

market has been as prone to mergers and acquisitions as any other industry and one must 

expect some more activity as potential providers seek opportunities for growth. 

A service provider involved in such a merger will need to make extra efforts to ensure 

that the service level is maintained and communication with the client treated as a major 

priority. However, a merger or acquisition is not predestined to seriously affect the relationship 

because in all probability the same people on the client’s side will still be dealing 

with the same people on the provider’s side and most of these are likely to have transferred 

from the client. 

Not all service providers are blessed with top quality management and they are not 

immune from the range of problems facing other types of businesses, such as making bad 

decisions or enduring bad luck. Service providers can, therefore, collapse leaving their 

clients in trouble. It is to be hoped that, in most cases another provider will step in 

quickly to pick up the pieces. Nevertheless, the clients are always going to suffer in such 

circumstances and this factor alone justifies the careful study of providers even before 

they are short-listed. 

Will the service be flexible enough to cater for major changes 

The addition or loss of business due to acquiring or selling divisions or whole companies 

will usually require a great deal of extra effort and creativity to manage whether the service 

is outsourced or not. In the traditional business environment the future uncertainty of 

such changes to workload is such that planning for their eventuality is largely ignored. 

In an outsourced situation, however, the client can request that unexpected business 

demands be allowed for. For example, it might be written into the contract that the 

agreed service level would be maintained and charged for at a proportionate rate, even if 

the workload increased or decreased by say 20 per cent. The necessary terms to ensure 

that this happens will need to be spelt out in the contract. In addition the spirit behind 

this approach should be written down and form part of the management culture. 

It may appear unfair that allowing for these unexpected business demands should


form part of a contract when the client would not be in a position to obtain the same 

benefits if the service was to remain in house. However, the service provider will be in a 

completely different situation as regards potential business growth. This will be particularly 

true if the provider can see the service growing on the site from other developments 

with other clients. 

Disrupting business during the transition to the service provider 

The transfer must carry with it the risk of disruption to services and this will be particularly 

so when other major changes, such as implementing new ERP systems, are being 

carried out within the transition period. 

In order to reduce the chance of this happening both parties must carry out their own 

risk assessment studies, although this could take the form of a joint pre-contract risk 

assessment. However, when the risk assessment is carried 

out it should result in an implementation plan that identifies 

all the really important events along the way. This plan 

should clearly illustrate the nature and quantity of the 

resources that will be required and highlight, for all to see 

and understand, the phased transfer of functions or 

processes. Overall the plan will need to allow, as far as possible, 

for unexpected business demands. Any element of 

the transfer that looks ‘tight’ should be analyzed in detail 

and every opportunity pursued to ease the timing. 

The senior management of both parties will need to be 

particularly observant and supportive in organizational 

matters during the transition period. 

when the risk 

assessment is 

carried out it should 

result in an 

implementation plan 

that identifies all the 

really important 

events along the way 

The client’s concerns 

In addition to highlighting the areas of risk, the client’s management can be forgiven for 

being concerned about other factors where the dangers may be more long term. 

What will be the effect on the retained staff 

Typically, the provider recommends that something like the top 10 per cent of the senior 

staff should stay with the client, although this will vary according to a variety of factors 

including the number of people transferring. Experience suggests that the more senior the 

retained manager, the higher the satisfaction level is likely to be. Therefore the IT 

Director or the Finance Director will probably be happier with the new service than the


other retained staff dealing directly with the outsourced team. This is natural because in 

all probability a higher service level will have been built into the system than existed previously, 

which in turn ought to create time for increased business development activity 

amongst the most senior staff retained. 

The management lower down and closer to the outsourced service should, in theory, 

obtain similar advantages. Instead of spending the majority of their time in the management 

of people, they ought to have the opportunity, once the transfer has been 

completed, to spend most of their time on business development, which in turn should 

enhance their own career development. 

Sometimes the retained middle management start to see or imagine greater career 

development opportunities on the other side of the fence, and some have been known to 

leap over it during the course of the contract. It would be surprising if the retained 

middle management did not start to have future career doubts during the early stages of 

an outsourcing. For this reason some enlightened providers have agreed to secondments 

for any or all of the retained management within appropriate parts of its organization and 

others have provided regular ‘free’ training courses for the retained staff. 

Can a service provider’s people have the same knowledge and 

commitment as the client’s employees 

In the short term, of course, ex-employees will staff the service so the problem should not 

exist. However, it must be realized that even junior staff will have acquired their in-depth 

knowledge through day-to-day contact over months or years with colleagues in other 

business areas, such as sales and purchasing, or from direct customer contact. In these circumstances 

anything that reduces the chance of such contact could have a detrimental 

influence on the way the service is carried out. 

Experienced service providers will recognize the dangers in losing this day-to-day contact 

and this is one reason why some of them now recommend that the service should be 

sited as close to the existing premises as possible. In other words, they recognize the need 

for the outsourced staff to benefit in business terms from close contact with other sections 

of the client’s activities. 

Where the service is sited close to its original or other equally suitable location and 

sufficient incentive is created amongst the staff to carry out a first class service, then the 

provider will probably be in a position to claim that nothing will be lost by outsourcing. 

Where the outsourced function is located well away from the rest of the client’s business 

activities, it would appear that there must eventually be a loss of knowledge about 

the core business amongst those involved with transaction processing. Some knowledge 

could be lost immediately if key staff are unable to relocate and the provider’s chosen site 

is not within commuting distance. In addition, the passage of time will thin out the 

number of staff who originally transferred and so, in theory at least, increases the chance 

that the real business knowledge level is reduced.


Several service providers dispute this last point and 

claim, with some justification, that despite the theoretical 

disadvantages of taking the transferred staff away 

from their original business location and often even 

completely replacing the staff over a short period of 

time, they have nevertheless supplied the client with an 

improved service level. 

Will the retained management have access 

to information 

The answer is to insist that full on-line access is available to 

all or certain specified members of the retained staff and 

that they can ‘drill down’ to whatever level of information 

they deem necessary. 

where the outsourced 

function is located well 

away from the rest of 

the client’s business 

activities, it would 

appear that there must 

eventually be a loss of 

knowledge about the 

core business amongst 

those involved with 

transaction processing 

Will the client lose the know-how necessary to carry out the work 

The client only loses those skills that it actually transfers but the retained managers will 

continue to have access to the skills of its former employees via the outsourcing and 

they ought to be fully aware of what is taking place even though they are not carrying 

out the activities. 

Nevertheless, in the early days of IT outsourcing, many clients did find that their 

chance of taking the work back at the end of the first contract, or even passing it to a different 

provider, was severely limited because the retained skill base had been eroded. In 

the circumstances they could not be sure that sufficient numbers of the original staff 

transferring would be willing either to transfer back or to transfer to another provider. 

This is a difficult issue and I suspect that in some cases the management of client organizations 

has dealt with it by concluding that ‘the contract is for five years and we may not 

be here after that’. If the outsourcing option is chosen then the retained management 

must constantly review the possibility of the retained skill base falling to an unacceptable 

level and take whatever steps are deemed necessary to counteract the problem. 

On the subject of ‘lost know-how’, it often happens that when systems undergo major 

change valuable knowledge is lost with the passing of the old systems, even when the 

work is supervised by in-house staff, simply because that information did not feature in 

current regular reports. This is even more likely to happen when the systems are subject 

to re-engineering and the provider’s consultants supervise the work.


The service provider’s pre-contract 

risks and concerns 

Service providers must also consider the risks involved. Rightly or wrongly they all believe 

that they take on most of the risk once the functions under consideration become their 

responsibility. But they are all very much aware that their risk can start very soon after the 

very first contact with the potential client because they are obliged to put considerable 

effort into various presentations to the client for which they are unlikely to be paid. They 

do this preliminary work in the full knowledge that the client is not certain to outsource, 

and even if it does, the work may go to another provider. 

The commercial risks involved in acting as an outsourcing service provider are many 

and various. The actual risks and their relative degree of importance will vary enormously 

for each outsourcing arrangement, depending on factors such as the size and complexity 

of the work involved, the price quoted and how ‘tight’ the contract is. For these reasons, 

an organization contemplating acting as an outsourcing service provider for the first time 

should ideally have extensive experience in contracting to provide specialist services. 

However, when the provider first begins a dialogue with a potential client, it is the 

pre-contract risks that are uppermost in the thoughts of the executives concerned. 

As previously stated, the service provider starts to take on risk as soon as a dialogue 

starts with the client. The provider’s pre-contract risks and concerns can be summarized 

as follows: 

● 

● 

being caught up in a lengthy pre-contract period during which time the provider will 

need to put in a great deal of effort for which it does not get paid; and 

the client chooses a provider and pursues the outsourcing option but cannot find the 

will or the effort required to make the change.

chapter 

10 

what does all this mean 

The competitiveness problem – 

conclusions 115 

The in-house solutions to competitiveness – 


The outsourcing solutions – 


Some other conclusions 121

what does this all mean 115 

The competitiveness problem – conclusions 

In the first chapter of this book I expressed the generally accepted view that the most serious 

problem facing management today is the absolute need to achieve and maintain competitiveness 

in everything the organization does. Although few people would now doubt the 

importance of maintaining competitiveness, I fully appreciate that this claim will appear 

slightly odd to many people because a manager’s performance is not normally compared 

against relevant functions in competing organizations. In time, benchmarking techniques 

may develop to the extent where it is possible to make such 

comparisons, but they certainly don’t exist today. Instead, 

most organizations still rate individual managers by the tried 

and tested method of setting an annual budgeted target and 

then measuring actual performance against that target. The 

main exception to the ‘match the budgeted target’ rule 

occurs when major projects are set up and individuals can 

then be set specific tasks both in terms of time and budget. 

However, even then there is normally no way of knowing if 

the targets set are truly competitive. 

The lack of measurable targets inevitably means that the 

importance of maintaining competitiveness is largely 

achieving 

competitiveness 

requires reengineering 

each 

service in some way 

to secure an ideal 

mix of key benefits 

ignored. Given this situation, it becomes vitally important to constantly remind managers 

what is involved if they are to strive to be competitive. 

Achieving competitiveness requires re-engineering each service in some way to secure 

an ideal mix of key benefits. These benefits include ensuring that continuous improvement 

to the service takes place, making sure the image created is one of quality, 

maximizing speed of performance and finally, cost reduction. In other words, it is necessary 

to perform each group of processes as efficiently as possible given the constraints of 

the marketplace and available resources. Simply to aim for cost reduction is unlikely to 

achieve the desired goals. 

The importance of being competitive is not new, but advances in technology and the 

resultant globalization of business make the problem far more acute than it once was. To 

some extent, the problem and the effectiveness of current solutions are all confused by the 

rapidly accelerating rate of change. The confusion was there before the creation of the 

internet in the mid 1990s but will become increasingly marked as time goes by.


We therefore have a situation where competitiveness is becoming increasingly important 

but we usually have no clear idea of how we are performing when compared to other 

competing organizations. In such circumstances how can any functional head really be 

judged on a competitive performance basis 

Lack of competitive knowledge is a prime reason for involving external specialists in 

the business. A leading external specialist is much more likely to be aware of competitive 

developments than any individual client organization. 

The in-house solutions to 

competitiveness – conclusions 

When faced with yet another call on scarce resources to bring one or more functions up 

to the desired level of efficiency, senior management ought to be very firm in their dealings 

with the project sponsors. To start with, the business plan must take account of the 

anticipated life span of the systems to be implemented. If it is decided that it will be a 

minimum of five years before a further performance improvement could begin, then the 

minimum aim must be that the service is still competitive in five years’ time. If it is fair to 

counter that statement by asking ‘How can we possibly know how competitive it will be 

in five years’ time’ it must be equally fair to ask ‘Why spend so much money if you can 

not be reasonably certain of long-term competitiveness’. 

I believe that internal performance improvement projects that do not result in lasting 

post implementation competitiveness for the functions concerned, are not only failures, 

they are a waste of time, money and opportunity. 

Most organizations require their managers to produce business plans for major performance 

improvement projects and these business plans require a trade-off. Therefore, 

the anticipated cost of new equipment, software, communications, consultants, contractors, 

etc. are added together and balanced in some financial way with future reduced costs 

and improved service. Not surprisingly, the vast majority of such business plans forecast 

future savings and improvements after implementation that at least covers the anticipated 

costs. My argument is that the savings and improvements need to be substantial to justify 

the expenditure of a major project and to be effective, they must include some promise of 

continuous improvement. 

When projects have taken two years or more to implement, it is often difficult to 

measure the finished results because time has taken its toll. Customers may have 

requested changes to the service, and acquisitions or sales of business divisions may have 

taken place. Two years is a long time in the current commercial environment and a 

number of project sponsors have begun projects in recent times quite convinced that any 

failure will be disguised by changes that will inevitably be required during the project’s


life. Some changes occurring during the project may help to improve the chance of success, 

but normally the opposite is the case. Given these problems, any project team that 

gets close to its targets after a long project is due some measure of praise. 

Getting close to or achieving the targets set may not be the same as putting the function 

in a lasting competitive situation. Benchmarking current and medium term 

competitiveness is not going to be easy or particularly accurate, but a serious attempt to 

achieve such a measure must surely be made before every sizeable project. If taking this 

action achieves nothing else, it will help to emphasize that it is ultimate competitive success 

that is the real aim; not achieving stage targets set by the business plan which may 

not be meaningful in the long term. 

The fact that a performance improvement project lasts many months or years automatically 

means that in most organizations a further attempt is unlikely to be made 

within the same function for a further five to seven years. 

Where a project fails, therefore, this cost of lost opportunity, 

although almost impossible to quantify, can be 

substantial and in terms of future profitability, the effect 

may be far greater than the total initial expenditure on the 

failed project. 

There must be serious doubts about the chances of 

success when trying to bring about performance improvements 

on a purely in-house basis. My concern is based 

upon the following. 

● 

● 

● 

● 

To bring about a significant change, a major project 

will be necessary. However, even minor projects are 

disruptive, time consuming and costly. 

there must be 

serious doubts about 

the chances of 

success when trying 

to bring about 


improvements on a 

purely in-house basis 

Even with major ERP projects covering most of an organization’s functions, it is 

often deemed necessary to complete the work on one function before starting on 

another. If the whole process takes several years to complete, there is always the 

chance that the first function worked on will be out of date by the time the overall 

project is completed. 

Although it is not possible to provide accurate figures regarding the success/failure 

rate of internal performance improvement projects, the general perception is that a 

significant number fail to meet all the targets set for them. 

Even where a performance improvement project meets the targets set, there is a good 

chance that cost savings will be considered of disproportionately greater importance 

than service improvements. Unless great care is taken, undue emphasis placed on 

cost savings could result in redundancies that seriously limit future opportunities to 

recruit top quality staff.

118 


● 

Even where internal performance improvement projects are considered successes, 

how long will that success last If the function that has just achieved a true 

competitive rating is not permanently staffed by specialists and cannot recruit 

sufficient specialists because it cannot grow by taking on new clients – how long will 

it remain competitive 

As stated earlier, it is always going to be difficult to estimate the degree of success or failure 

for any single project if true lasting competitiveness is the target. Amongst the 

difficulties involved are confused or inadequate targets and the natural desire to be associated 

with success. For commerce as a whole, therefore, it is probably never going to be 

possible to give accurate estimates, because however good the research skills, the individual 

organizations will be loath to admit failure and will consequently disguise it. 

However, I don’t think it matters that we cannot be sure of the exact failure rate. We 

are all sufficiently aware of the major failures to accept that they do happen frequently 

and common sense dictates that there must be many other failures that don’t get publicity 

because they don’t directly affect the public. Add to that the admitted narrow failures and 

the significant number of instances where the target was not set high enough, then the 

situation is bound to be more dismal than is generally accepted. 

I believe that if the true level of failure were known, then Chief Executive Officers 

would be far less inclined to approve the considerable costs involved with internal projects. 

Just consider what is involved in most organizations. First function A starts its 

project and when it is finished it is function B’s turn and so on. In this way it is hoped to 

improve the competitiveness of the organization by applying the scarce resources needed 

in a balanced manner. But concentrating on one single function or group of functions at 

a time does not mirror what is happening in the real world, where developments tend to 

take place on a continuous and seamless basis across all functions. 

This may appear to be a plea to confine internal projects to multi-function, totally 

integrated, ERP-type systems that involve almost all areas of an organization. I do 

accept that there is sound logic in integrating systems throughout an organization, but 

I am certainly not in favour of lengthy projects. Therefore, I accept that mammoth, 

organization-wide projects lasting many years and operating 

on a continuous basis are not desirable. 

internal solutions 

that do not benefit 

from utilising external 

specialists on a 

continuous basis will 

rarely make sense in 

the future 

If, however, attention could be given to all the information 

systems requirements of an organization in a project 

lasting a few months instead of a few years, then an ERP 

type implementation could really begin to make sense. For 

that reason, the ASP concept of rapid Web-enabled implementations 

would be extremely valuable if they can be made 

to work for the many rather than the few. In addition, the 

tenure of office of senior managers is getting shorter all the


time and this creates a tendency for these senior managers to ignore the medium and long 

term in favour of the short term. Therefore, the ASP concept is likely to match the personal 

targets of these senior managers whilst providing a measure of external specialist support on 

a long-term basis. Internal solutions that do not benefit from utilizing external specialists on 

a continuous basis will rarely make sense in the future. 

The ASP route, therefore, offers some prospects for success with internal projects, but 

the skill shortage is very likely to limit use of even seemingly ‘magical’ new developments for 

some time to come, so pinning all hope in one area of technology is never a very good idea. 

The outsourcing solutions – conclusions 

For certain key non-core functions such as IT and finance there are, in theory, considerable 

competitive advantages to be obtained from their transfer to external specialists. 

However, many organizations have found, to their considerable cost, that outsourcing is 

fraught with difficulties. 

Experienced observers of outsourcing arrangements will have little trouble accepting 

the following as factual. 

1 

2 

3 

4 

It is possible to work with just one provider on a sole sourcing deal and yet 

obtain a contract that provides for an improved service at a reduced cost to the 

client. However, there is also a good chance that the arrangement will fail to 

meet the client’s needs. 

The process of working with a number of providers in the early pre-contract 

stages by creating a competition, will probably give the client a better 

understanding of the options available and so increase the chance of further 

improving both service and savings. Nevertheless, there is still a good chance 

of failure. 

With a conventional contract the provider is not motivated to make further 

improvements and savings above those stipulated in the contract. If 

continuous improvements are made the benefits will be weighted in the 

provider’s favour. 

The process of motivating the service provider by agreeing to some form of 

partnership arrangement has much to recommend it from the viewpoint of 

both parties. The additional rewards obtained by the provider will depend on 

its ability to improve the service further than the minimum stipulated in the

120 


contract – therefore it is not necessarily an additional cost to the client. It has 

to be accepted though, that even this type of arrangement sometimes fails to 

provide satisfaction for the client. 

5 

6 

Failure of outsourcing partnership deals are most likely to occur because the 

service providers are either incapable of meeting the standards required, or 

more likely because they take on too much work and so water down their 

effectiveness. This raises doubts as to whether any deal between client and 

outsourcing service provider can ever be considered a true partnership. 

If the basic reason why partnership outsourcing arrangements fail is because 

the provider spends too much time with other clients who are all looking for 

their share of scarce resources, then it follows that the problem would not exist 

if the provider had no other clients. 

Separate joint venture companies set up by client and service provider would appear to 

get around the problem of resources being spread too thinly. There are many such joint 

ventures operating in this way. Typically, they are formed on the basis of the client having 

some special position in the marketplace and the provider creating software solutions to 

exploit that position. On this basis, the client’s IT department and other related areas will 

probably be transferred to the new company, together with other services such as marketing. 

The service provider may also transfer marketing skills alongside software specialists, 

etc. Therefore most of these joint ventures depend on getting the marketing right equally 

as much as on the quality of the new systems development. Almost all these arrangements 

build in the possibility of the new company acting as an outsourcing service provider for 

other clients in due course. But clearly, the marketing element of this type of joint venture 

is always going to make comparison with conventional outsourcing arrangements 

very difficult. 

Conventional outsourcing is subject to a range of problems, most of which boil down 

to the question of getting the desired share of the skills available. The outsourcing service 

provider might be a Mecca for the very best technical skills, but if your organization is 

just the latest of hundreds or thousands of clients, how can you ensure the very best service 

Creating a value added, risk/reward sharing partnership will help in this respect but 

how effective will this be if the last half dozen or so deals entered into by the service 

provider were done on a risk/reward sharing basis 

● 

Taking advantage of the service provider’s own shared service centre may be 

beneficial to some if the client is using the same systems as the provider. For others it 

may be beneficial to involve the provider in some way in the client’s own shared 

service centre.


● 

For most client organizations, however, the best 

solution to the problem of getting the required share 

of skills and attention would be to own some of the 

service provider’s equity. For the client to obtain the 

desired benefits, the specialist service provider must be 

motivated to make continuous improvements to the 

service during the life of the contract. Recent 

experience has demonstrated that by far and away the 

best way for the client to achieve this is to take some 

measure of equity in the provider to ensure that it is 

always going to be a favoured customer. 

for most client 

organizations, 

however, the best 

solution to the 

problem of getting 

the required share of 

skills and attention 

would be to own 

some of the service 

provider’s equity 

Some other conclusions 

1 

2 

Services such as catering, cleaning and security are widely outsourced even 

though they exist without constant pressure to implement new technology. 

These services tend to get outsourced because they are seen as separate 

businesses and they are easy to outsource because they are rarely entwined 

with other areas of the organization through technology in the way that IT 

and Finance are. With all other functions, however, the pressure to outsource 

is largely based on the desire to achieve a measure of competitiveness by 

utilizing the latest information systems. The fundamental competitiveness 

problem is, therefore, usually related to changes in technology even where HR, 

Finance, Call Centres and other functions are being outsourced. I accept that 

many of these BPO areas are outsourced without the management concerned 

even considering the information systems factor. However, even these 

managers will accept that it is the constant change brought about by the 

development of technology that is fuelling the organization-wide pressure to 

become competitive by outsourcing. 

Quite clearly, the future technology needs of the organization is the most 

important area to deal with. There is a good argument for saying that until 

you are happy that the core IT function has reached a competitive standing 

and is likely to remain there, then other functions should not be subject to 

performance improvement projects.

122 


3 

4 

5 

6 

7 

Although outsourcing arrangements are fraught with problems, the use of 

external specialists offers the potential for improved service, cost reductions 

and continuous improvements that cannot normally be achieved by in-house 

teams that do not have the benefit of continuous external help and guidance. 

This factor will remain the main reason for outsourcing. 

Projects covering a single function or group of functions that proceed on a 

‘fire-fighting’ basis are not normally suited to most organization’s real needs. 

If a business function does not have the capacity to grow, it will not be able to 

attract the best and most skilled employees. 

For an internal function to achieve continuous improvements it will normally 

need to be: 

– core 

– capable of continuous growth 

– in a position to attract the best employees 

– in a position to take on new clients. 

For a service provider to perform well for an outsourcing client the following 

must apply: 

– the provider must be an established specialist; 

– the provider must be capable of recruiting top quality staff; 

– the provider must be motivated; 

– the client must be a very important customer. 

The overall conclusion must be that it is essential for all organizations to strive for lasting 

competitiveness. To achieve this goal, continuous involvement by external specialists is 

necessary, however, getting these specialists to concentrate fully on your service is easier 

said than done.

chapter 

11 

an alternative way of approaching 

the competitiveness problem 

Business satellites 127 

How a local authority might 

develop a BS venture 130 

SDC’s second joint venture 136 

Further explanation of the 

business satellite examples 138

an alternative way of approaching the competitiveness problem 125 

The most important conclusion from the last chapter is 

that to achieve competitiveness the client organization to maximize the 

needs to involve an external specialist. However, to maximize 

the chances of success the client needs to take some the client needs to 

chances of success 

equity in its chosen provider to ensure that it always take some equity in 

receives first call on the skills available. 

its chosen provider to 

I fully appreciate that it is going to be very difficult for ensure that it always 

even major client organizations to obtain such an equity receives first call on 

stake in existing outsourcing service providers. The alternative, 

as I see it, is for client organizations to create and 

the skills available 

build their own service providers. 

In this chapter I am going to suggest ways in which 

organizations of various types and size might go about creating their own providers. 

However, for many, these notions might require a leap of faith that is difficult to contemplate. 

In other words, some readers might react by concluding that it might work 

for others, but it would not be suitable for them at the moment. For that reason I have 

prefaced my ideas with the following story, which indicates how one group of normally 

very staid organizations have benefited from taking radical leaps of faith into the outsourcing 

world. 

In an Executive Report on outsourcing finance for The Institute of Chartered 

Accountants (ICAEW) publishing company in 1995, I included the paragraphs 

shown below. 

If we imagine an industrial estate of ten small manufacturing companies on the 

edge of a provincial city we would all accept that each company would need some 

form of security. In turn most of us would agree that it would not make financial 

sense for each company to set up its own security system from scratch, each with 

spare sets of security guards, dogs, etc. for emergencies. 

What is so very different about the finance departments Even if each of the ten 

manufacturing companies has different systems, staff levels and degrees of integration 

into other parts of their business, what’s to stop some entrepreneurial 

accountant or accounting firm taking over responsibility for all the accounting functions 

on the industrial estate and developing a system to cover all of their needs

126 


The above extract came from a section of the book in which I was trying to establish the 

following five points. 

1 Although the outsourcing of finance was then largely limited to major organizations, 

i.e. major clients and major providers, the situation was likely to change as the 

concept took hold. 

2 Outsourcing is best carried out on a local basis. 

3 It would be difficult for a firm of auditors to provide adequate outsourcing services 

in finance if they were not also IT specialists. This was likely to remain true whatever 

size the firm was and whatever size of client they were dealing with. 

4 It would require qualified consultants and specialists to bring about the necessary 

changes and continuous improvements. Not all auditing firms are so endowed. 

5 Despite the above ‘qualifications’, new opportunities were opening up for 

entrepreneurial firms of accountants. 

one firm was even 

receiving the daily 

accounts by fax from 

a manufacturer in the 

former Soviet Union 

After the report was published, a number of people contacted me regarding this idea and 

in turn I extended my reasoning in a couple of articles. About a year later I was asked to 

address the annual meeting of the ICAEW’s general practitioners group. The general 

practitioners account for virtually all the ICAEW members working as auditors outside 

the big international firms. Obviously, my task was to explain what was happening in 

financial outsourcing and to explore with them any potential new markets. 

I expected that most of the delegates would have little interest in the ideas I was presenting 

and in that respect I was not disappointed. Nevertheless, many others were 

sufficiently interested to move quickly into a non auditing environment and over the following 

days and weeks many of them kept me informed of their plans. These were 

typically to target potential clients in their locality that were not already auditing clients. 

The most important discovery made at this conference, however, was that a number of 

firms were well ahead of me. One firm had effectively given up auditing altogether and 

concentrated instead on providing comprehensive business 

process services over what was a relatively small geographical 

area. They had in fact started by targeting local business 

estates. Others were using the internet to promote their 

services. Very soon, articles appeared in the national newspapers 

explaining how British firms of chartered 

accountants were doing the daily accounts for both local 

and international companies. One firm was even receiving 

the daily accounts by fax from a manufacturer in the 

former Soviet Union.


I anticipate that more and more firms of chartered accountants will obtain business in 

this way. Nevertheless, without extensive discussion and publicity, my view is that growth 

in this business area is going to be relatively slow. Let’s face it – it is difficult to bring 

about a change as fundamental as this in long established organizations. Apart from challenging 

the very concept of shareholder accounts and even the need for professional 

qualifications, it might also suggest to some accountants that auditing is being exchanged 

for low-grade work. After all, there are non qualified or poorly qualified people making a 

living by acting as part-time accountants for one or more small manufacturers and service 

companies in most towns. 

Other reasons, such as an aversion to selling, may limit chartered accountancy firms 

from developing this business area quickly, unless the internet comes to their rescue or 

their potential clients were to see these firms as outsourcing service providers independently. 

But if some firms of chartered accountants can make the enormous leap of faith by 

becoming outsourcing service providers, then it should be possible to think of other ways 

of meeting the competitiveness challenge. 

I have suggested above that outsourcing arrangements are more likely to work for the 

client organization that obtains a large measure of control and ownership of the service 

provider than one with less control and ownership. But how would a client organization 

set about obtaining equity in one or more service providers 

Business satellites 

At this point I would like to introduce the concept of ‘business satellites’. I believe that 

the concept could be applied to organizations of almost any size and any description. 

The business satellite concept will not be necessary for an organization that: 

● 

● 

● 

● 

can honestly claim that its non-core functions are competitive now and will remain 

so in the future; 

despite past changes which might have involved the releasing of middle 

management, they can justifiably claim that there is sufficient growth potential in its 

non-core functions to attract the best qualified staff; 

can guarantee that the next technology project will be implemented in a competitive 

timeframe, at a competitive cost, will meet the targets set for it and will provide a 

competitive advantage for many years ahead; 

will shortly re-engineer its non-core functions in such a way that a long-term 

competitive advantage is assured;

128 


● 

● 

● 

will meet development needs by ensuring that the highest quality of staff is always 

available for such work; 

can ensure that where outside specialist help is required, this will be of the highest 

possible quality, will be cost effective, will avoid or limit internal disruption and will 

produce results that guarantee a competitive advantage for many years to come; 

will use the best service provider available for any outsourcing arrangements which 

will result in providers making substantial service improvements, costs savings, 

continuous improvements in a situation where the organization is a key client and 

each month the provider strives to do even better than in the previous month. 

I suggest that any organization that cannot be positive about the issues detailed above 

could benefit by setting up a business satellite (BS) programme. Before I describe a BS 

programme in detail, I want to explain my thinking a bit more. 

1 

2 

3 

I am not saying that organizations should dispense with management 

techniques such as business process re-engineering. I believe these techniques 

have played and will continue to play, a valuable part in modern business. I 

am, however, saying that you should both understand their limitations and 

your own success rate at handling past projects of this type. 

I am not saying that organizations should ignore the potential for improvement 

offered by the implementation of ERP systems and other technology 

developments that might integrate the business processes. Far from it, the logic 

of developing integrated systems has been apparent for a 

management 

does not solve its 


problem just 

because an ERP 

implementation has 

been completed 

very long time. The trouble is that ERP systems are 

probably still at a development stage comparable to that 

of the motor car in the 1920s, with the mechanics and 

drivers belonging to an even earlier era. I accept that as 

they exist, they cannot be ignored, and that most sizeable 

organizations have to bite the bullet and buy them. It is, 

however, essential not to consider them the ultimate 

solution to the competitiveness problem. Management 

does not solve its competitiveness problem just because an 

ERP implementation has been completed. 

I am not arguing against the use of management consultants. Without doubt 

the dramatic benefits, in terms of performance improvement, achieved by 

some major organizations probably would not have been possible without help 

and advice from these specialists.


4 

I am not making the BS suggestions as a means of holding back the tide of 

change. I accept that more and more people will work for themselves in various 

types of contracting roles in the future, but I don’t necessarily think that this 

heralds catastrophic short-term changes in the way organizations are managed. I 

accept the concept of the virtual organization – but I doubt that many of the 

organizations already in existence today will have achieved virtual status by 2020. 

forecasts of the 

future may be useful 

in concentrating the 

corporate mind on 

the competitiveness 

problem, but without 

positive action they 

cannot be a solution 

to the problem 

In summary, no human being can see what the future will 

bring, but we have to make decisions that constitute our 

best estimates. Forecasts of the future may be useful in 

concentrating the corporate mind on the competitiveness 

problem, but without positive action they cannot be a 

solution to the problem. All the usual solutions start from 

the assumption, which is normally correct, that the situation 

is desperate and that this, of necessity, requires a 

major firefighting exercise. Very few people could justifiably 

claim that their internal projects and outsourcing 

arrangements are the result of a carefully thought out longterm 

plan. 

Is there a way of dealing with the competitiveness problem 

that allows for long-term planning and an easier alternative path to salvation The BS 

programme looks for this easier path. 

A BS programme is based on the following principles. 

1 

2 

3 

4 

Most organizations will want to perform core functions in house but will be 

willing to consider the advantages of passing non-core functions to specialists 

in those business areas. 

In-house performance improvement projects for non-core functions tend to 

fall short of meeting the targets set for them. 

However beneficial outsourcing might be in theory, it is not easy to be sure 

that the service provider will remain committed to ensuring the best possible 

service for each and every client. 

The greatest chance of outsourcing success is likely to arise in situations where 

both client and service provider have a financial interest in making the 

arrangement work. This must go far beyond simply meeting the contracting

130 


details in order to obtain a specified fee. In most cases some form of joint 

venture will be necessary. 

5 

6 

7 

The technology factor is the key element in maximizing the performance of 

non-core functions. 

The development of BS programmes should not result in too much extra 

pressure, financial or mental, being placed on management. In any 

commercial environment the best way to avoid pressure is to plan ahead. With 

BS planning ahead is straightforward, because having accepted that it is the 

technology element that is causing the problem, management is free to create 

one or more parallel IT organizations to duplicate and later take over the 

functions controlled by its current information systems. The time from 

creation of the BS to its takeover and control of existing systems can be 

flexible. A BS could therefore be set up for a function that is currently being 

subjected to a performance improvement project or is already outsourced. 

Being empowered to do your own thing and working for an organization in 

which you have a financial stake is an ideal incentive for producing excellent work. 

The following theoretical example illustrates how BS programmes might work. 

How a local authority might develop a BS venture 

Smalltown District Council (SDC) is a relatively small council close to the borders of 

a large provincial city. The chief executive of SDC believes that the problems they face 

are getting worse month by month. A project starts with the express aim of 

establishing which processes should continue in house and which would be done 

better if they were transferred to external specialists. Eventually, the project 

management committee reports that in a number of areas of work where information 

systems are involved, the externalization option should be seriously considered. Other 

areas not involving IT are recognized as potential candidates for outsourcing but there 

is general agreement that all these activities should continue in house until the IT 

requirements are fully understood and accounted for. 

Following this conclusion SDC decides to begin a BS programme. It is informed 

that the first step in the programme is to set out all its key business processes and, if 

possible, separate them under their controlling functions. The object is to find those 

processes that are failing or likely to fail completely within, say, a three-year period and 

to see if it is possible to find a partner or partners for these services.


When the areas using IT were rated in terms of ‘the most urgent to deal with’, the 

most important area turned out to be Housing Benefit. This was surprising in some 

ways, in that this service had actually been outsourced four years previously and was 

the authority’s only experience of outsourcing. Furthermore, the arrangement was 

proceeding according to plan and was showing SDC reasonable savings when 

compared to the last in-house costs. 

The problem currently faced by SDC in this area is 

that they now think that they are being seriously 

overcharged. Normally speaking, a function as relatively 

small as housing benefit would not be outsourced in 

isolation from other similar business processes. SDC 

took the step to outsource almost in desperation. A few 

years previously the council had been subjected to a 

number of unforeseen problems, including an 

unexpected influx of people from outside its own 

boundaries. The result of this was that claimants were 

waiting excessive periods of time to make claims and 

would often return several days after making the 

normally speaking, a 

function as relatively 

small as housing 

benefit would not be 

outsourced in 

isolation from other 

similar business 

processes 

original claim, only to find that their details had not yet been entered into the system. 

After studying the situation in 1996, SDC was convinced that it should 

immediately outsource this function. However, the operation was relatively small 

and only one service provider expressed serious interest. When this provider finally 

took over responsibility it quickly involved document image processing (DIP) 

specialists. The result is a system in which the claimant is directed to a small desk 

in the authority’s main reception area where the relevant benefit claim details are 

immediately scanned into a computer. Then, by the time the claimant has reached 

the main housing benefit desk, the details are up on the screen and the claim can 

be processed. 

The contract has one year to run and the service provider has already informed 

SDC that it would be willing to sign a further five-year contract at the existing price 

plus 1 per cent annual increase to compensate for inflation. 

On the face of it this appears to be a genuine offer made by a fair minded service 

provider, particularly as the first contract was priced at roughly 75 per cent of the 

authority’s own costs. SDC’s management does not share this view. For one thing, 

claims are currently at least 25 per cent fewer than four years ago, but, more 

importantly, it has become apparent to a great many people that due to the use of DIP 

and other technology, the provider is using only 40 per cent of the staffing that SDC 

used. Consequently there is now a widespread view that the provider must be making 

a substantial and unacceptable profit from the arrangement.


SDC’s management feels uncomfortable and threatened by this situation. In recent 

times they have tentatively approached other service providers, but now doubt that 

any of them will come up with a substantially better deal than their existing provider 

is offering them. 

Much of the internal criticism stems from the view that the service could now be 

done in house at a considerable saving on current outsourcing costs. Several internal 

mid-ranking managers have put forward the view that the DIP technology is no 

longer that special. They also argue that the provider appears to be staffing the system 

without any obvious technical back up. Nevertheless, senior management recognize 

that taking the service back in house will involve considerable risk for an organization 

that is short of the required technical expertise in most areas of activity. This is the 

basis on which the housing benefit function was included in the study. 

When senior management study the project team’s findings they see a potential 

answer to their problem. There are several other business processes, both existing and 

potential, that could benefit from either the type of treatment the original provider 

gave to housing benefits, or from being associated with the housing benefit work. 

There is a temptation to offer this extra work to the existing provider but they decide 

against it. Instead, the management accept one of the cornerstones of BS – that to be 

sure that you have the best chance of becoming and remaining competitive the client 

must have a financial stake in the provider. 

The overall logic of the SDC scheme is as follows. The internal IT department has 

never really performed at an acceptable level and there are real doubts that the authority 

will ever be able to attract people of sufficient quality to change this situation. 

Nevertheless, their own experience of outsourcing, their size and the problems that have 

been related to them by other authorities all point to the conclusion that they should shy 

away from any conventional outsourcing agreement. Consequently, they resolve to 

maintain the status quo as far as the IT department is concerned but to let it be known 

that they will shortly create a fledgling IT development company which they hope will 

one day take over all their own IT work and that of other organizations in the locality. 

They stress the local aspect of the concept by arguing that environmental needs will in 

future limit home to work commuting. 

They hope to ensure the continued strength of the existing IT team by telling its 

members that they will have the opportunity to work alongside the new company on 

any work that is obtained privately and in due course, providing targets are met, there 

will be an option to transfer to the new company. A further ‘carrot’ is created by the 

statement that individual equity in the new company will be open to existing IT 

department members for exceptional performance. 

To make sure that the new venture will have every chance of success, SDC’s 

management believes that just one area of IT activity should be targeted in the first


few years. Not surprisingly, they decide to concentrate on housing benefit work and 

the other related areas. 

However, the level of current authority work in the areas under consideration is 

relatively low and they have no short-term way of knowing the potential for the 

satellite company to sell its services across the local business community. Without 

being able to quantify the short-term potential of the new venture, they prudently 

decide on a three-year development period before the satellite company takes full 

control of the targeted areas. Accordingly, they negotiate in advance with the current 

supplier of housing benefit services a new two-year deal for existing services only. This 

gives them a breathing space of almost three years to grow their own service provider. 

In accordance with government guidelines, they contact all the other local 

authorities in the area and put the idea in some detail to each of them. Although some 

of these authorities initially show enthusiasm, it turns out, after six months of talks, 

that none of them has quite the same agenda as SDC. 

Identifying joint venture partners 

The next step is to begin a search in the local area for a 

small organization that would make a suitable joint 

the next step is to 

venture (JV) partner. Initially their search was confined begin a search in the 

to small existing local IT companies, but after a number local area for a small 

of initial discussions the SDC management decided to 

organization that 

widen the target to include other small organizations 

would make a 

with a growing IT development capability. Eventually 

suitable joint venture 

they found one organization that looked suitable and 

(JV) partner 

where all the principals were excited about the potential 

outlined by SDC. 

This is a three-partner firm of chartered accountants. 

One of the trainee accountants at this firm has developed his IT skills to a high level. 

The firm has benefited not only from his improvements to their own financial systems, 

but has gained considerable goodwill and fee income from contracting him and his small 

team out to clients. One area in which he has been particularly innovative has been in 

creating small but sophisticated networks. The trainee and his firm have had to pay a 

price for his success. His studies have suffered because he has spent an unusual amount 

of time on IT work. The shortage of study time problem is likely to get worse because he 

has recently married and his wife is now expecting a child. Just prior to SDC 

approaching his firm, the young man had informed the partners that as he was unlikely 

ever to qualify and become a partner, he was giving them as much notice as possible that 

he would soon look for a new position or start his own business. He indicated that he 

was ambitious and now believed that he had a future as a developer of IT systems. In

134 


return for being open about this he hoped that he might be considered for contract work 

in the future. As a growing number of competent and successful IT specialists are now 

working under the direction of the trainee accountant, the partners have much to lose. 

Joint venture arrangements 

Within a few months of finding this joint venture partner SDC had created a new 

small limited liability company with a start-up capital of £100,000. The ownership is 

split 80 per cent SDC and 20 per cent to the chartered accountancy firm. However, 

half of SDC’s holding (40 per cent of the total) will be transferred to certain key 

people who meet agreed targets within a two year timeframe. 

Amongst these key people will be a marketing and sales manager recruited to begin 

the initial sales foray into the local marketplace, the IT specialist from the accounting 

firm and any other new employees who make a substantial contribution to profitable 

growth. The shares will be allocated in a way that both takes into account the 

perceived difficulty of the task set and their performance against target. Any shares not 

earned by performance will be retained by SDC. A maximum of 25 per cent of the 

total share value of the company will go to the new ventures people if they meet the 

targets set for them. In addition, SDC will use the other 15 per cent as a carrot for 

relevant authority employees who have demonstrated that they have added value to 

both the joint venture and the authority during the initial two years. 

Benefits and drawbacks for SDC 

The management at SDC will always have first refusal on the expertise and services to 

be developed by the new company. They believe that this will provide a very useful 

technology ‘back up’ in a number of business areas. In particular they believe that by 

the end of the second outsourcing contract for housing benefit services, the new 

company will be able to provide a replacement service at a much reduced cost to the 

authority. Other benefits include the following. 

1 

2 

3 

Management will be seen as taking prudent steps to stop excess profits 

going out on a continuous basis to the current outsourcing service provider. 

It will be demonstrated that it is possible to work for a local authority and yet 

still benefit from the equity opportunities found in the market economy. 

The IT specialist and possibly others will still work for their original 

organizations for part of each month in the early stages. Consequently the 

new venture will not have to fund all their costs.


4 

5 

With luck, the authority may have created a profit return that can in future 

be used to offset local taxes. 

The authority will have created a pilot scheme that can be repeated and 

improved upon for other business process areas. 

Drawbacks will include the capital at risk, which 

will always need to be kept to the minimum, the 

time taken to get the project underway and the risk 

of failure. 

Benefits and drawbacks for the chartered 

accountancy partnership 

For this firm the benefits are as follows. 

drawbacks will 

include the capital at 

risk, which will always 

need to be kept to 

the minimum, the 

time taken to get the 

project underway and 

the risk of failure 

1 

2 

3 

4 

They get a reasonable stake in a new technology venture for a relatively 

small outlay. 

They dramatically improve their chances of keeping the services of their IT 

specialist on a part-time basis in the short to medium term. 

They would gain experience of an outsourcing/shared services 

environment. 

They might hope to build up a good working relationship with SDC 

which could in turn lead to other business opportunities. 

The drawbacks will include the very small risk of losing their £20,000 of capital. 

Benefits and drawbacks for the IT specialist and 

other employees of the new venture 

Here the benefits would appear to include the following.

136 


1 

2 

The opening up of new career opportunities without risking their current 

jobs or losing the advantages provided by their current jobs. 

The opportunity to get an equity stake in a potentially strong local 

company operating in a high technology environment without risking their 

own capital. 

The drawbacks are difficult to identify. If the venture fails they will be in no worse a 

position and they will have gained valuable experience. 

SDC’s second joint venture 

Shortly after setting up the company described above, SDC came across a second 

potential joint venture partner. This second organization is based in a high street 

shopping area and promotes itself as a specialist graphic designer. Despite this claim, 

much of the current workload involves selling stationery and printing letterheads. 

However, the owner has considerable graphic design skills and has obtained a 

reasonable reputation as a designer of websites. More importantly, though, he can 

demonstrate real potential as a publisher, both on and off line. In addition he employs 

two young women as graphic designers and both show considerable potential in 

publishing. At the time SDC approached this company both women worked on a very 

part-time basis as they had children of pre-school age. 

Unfortunately, the overall flow of work for the business has increased only 

marginally over the last few years, due to a major decline in the retailing business. 

Firefighting work in this area by the owner has often resulted in dramatic periods of 

boom and slump. The owner was rapidly coming to the conclusion that the retailing 

element of his business was in terminal decline, but it was actually taking up an 

increasing amount of his own time as he had been forced to make other retail staff 

redundant. However, he had serious doubts about his cash flow situation if he 

suddenly stopped retailing. Consequently the amount of effort he could put behind 

obtaining new design work declined rapidly and he began to question that he would 

ever be in a position to offer full-time work to both the other graphic designers, even 

if they wanted it. Of more short-term importance to him was the knowledge that the 

women also had doubts about the future of the business and had been involved in 

preliminary discussions about starting their own business if sales did not improve. In 

the circumstances the owner was willing to listen to SDC.


The parties decide to set up a new company that will concentrate solely on internet 

developments. The start-up capital, ownership and allowance for future share 

distribution mirror the situation for the first JV. 

Benefits for SDC 

SDC sees the following benefits in this second arrangement. 

1 

2 

3 

4 

5 

6 

It has created an inexpensive unit to exploit the future potential of the 

internet in general and publishing in particular. 

It has some internal work that can profitably be transferred to the new 

venture. 

It is aware that many of its own IT and other staff are contemplating 

internet projects. 

It has created a second venture that SDC’s existing specialists can move in 

and out of as the work dictates. 

It has a second company that will attract good local talent and which it 

hopes will grow to become an outsourcing service provider of one or more 

of SDC’s functions. 

It has a second company that may be in a prime position to eventually offer 

other local companies an outsourcing service on an ASP basis. 

Benefits and drawbacks for the owner of 

the graphic design company 

The owner of the graphic design company sees the benefits to himself as follows. 

1 

2 

He will considerably increase his long-term chance of success in an area he 

wishes to concentrate on. 

Although he has to find an additional £20,000 for his part of the venture, 

this is balanced by the security of obtaining other short-term work from 

SDC. As a result he will be able to rationalize his original business with 

fewer cash flow worries.

138 

I appreciate that providing an example in which a local authority is the prime mover in 

creating new joint venture companies may appear a little odd. Obviously, one would naturally 

expect the commercial world to initially show the most interest in a new business 

idea. However, I believe that any organization from either the public or the private sector 

which employs 50 or more people might benefit from creating a BS programme. 

I used the SDC examples because I wanted to demonstrate that the concept was also 

open to the public sector and because I believe that local authorities now have the freethe 


3 

4 

5 

He will hope to balance the highs and lows of his current operation by 

being able to move his existing staff between the two organizations as 

business dictates. 

He will be able to keep the two graphic designers in his original business 

on a part-time basis. 

He will hope to sell more goods and services to SDC. 

For him the only drawback is the risk of losing the capital invested in the new company. 

Benefits and drawbacks for the employees of the new venture 

The benefits would appear to include the following. 

1 

2 

The opening up of new career opportunities without risking their current 

jobs or losing the advantages provided by their current jobs. 

The opportunity to get an equity stake in a potentially strong local 

company operating in a high technology environment without risking their 

own capital. 

Again, the drawbacks are difficult to find. If the venture fails, the employees will be in 

no worse a position and will have gained valuable experience. 

Further explanation of the 

business satellite examples


dom to take all the actions I’ve described. I believe that 

few local authorities would now have problems with the I believe that any 

first JV because the aim is clearly to overcome an existing organization from 

problem. On the other hand, I am aware of local authority either the public or 

executives who would find the underlying profit motive the private sector 

behind the second JV totally unacceptable. But why which employs 50 or 

should this be a problem in the twenty-first century more people might 

Governments in various parts of Europe are taking gradual benefit from creating 

steps to allow public sector departments to embrace commerce, 

so why not take the opportunities on offer 

a BS programme 

When I have raised this issue with local authority 

doubters, the reasons that come back include not having 

either the time or the right type of employee, and not wanting to damage local businesses 

by competing with them. The first two of these arguments might be valid in the short 

term, but if they remain valid for the medium and long term then management is seriously 

at fault. The problem of competing with local businesses cannot be a genuine factor 

in the current commercial environment. Small businesses of almost every description are 

under increasing pressure from a growing number of competitors of local, national and 

international origin. Therefore, those businesses that collapse from local authority competition 

would have collapsed from other commercial activity if the authority had not been 

involved. Surely every local authority must do its utmost in the future to reduce the 

burden of local taxation. 

The term ‘radical’ can be used in two ways. It can be used to describe an advanced and 

probably controversial view, which by its very nature would be applicable to only a small 

number of organizations in the short term. It can also be used to describe sudden dramatic 

changes. I believe that the BS concept cannot be described as radical in either of 

these senses because it aims for a planned anticipation of information technology growth 

over a reasonable period of time. Conversely, an organization forced into a major internal 

project or outsourcing arrangement because it had failed to do the necessary forward 

planning should accept that it is being forced into a radical step. In other words, it is 

being forced into a dramatic change and there is a good chance that failure will result. 

Some people may question the advisability of employees working for more than one 

master, and although this practice is increasing, I am aware that failures as well as successes 

can ensue. Nevertheless, because equity will be available for a job well done, it 

would be up to the participants to ensure success. 

I would like to explain further the reason for stressing the importance of the local 

aspect in the example given. I accept that modern communication developments have 

made the world a much smaller and convenient place to move around in. I can also see 

that software products intended for use in Europe might be put together just as well and, 

currently, far less expensively in, say, India, than in Europe. But for the most part the

140 


as each new 

community has been 

offered the 

opportunity to 

embrace wage 

slavery it has usually 

been gleefully 

accepted 

major internal projects and outsourcing arrangements deal not with the basic software 

but with the application of the software, and this is a local issue that is best dealt with by 

on-the-spot advice. You might be able to arrange for the design of a vehicle by sending 

your ideas and requirements to a company on the other side of the world, but once the 

product was manufactured, the designer would not then be in an ideal position to advise 

on a particular problem with your car. 

Outsourcing service providers will normally argue that they can handle a client’s application 

equally well at a base many thousands of miles from the client’s main site as they could 

next door to it. Furthermore, they will probably be able to produce customers who will support 

their claim. However, I have noticed that when a client insists that a separate service is 

set up for it away from the provider’s other activities, then the provider will often stress the 

benefits of being next door to the client. These benefits arise from being close to the hub of 

the client’s business with the resultant opportunity to fully understand the underlying 

strengths and weaknesses in areas like marketing, manufacturing and distribution. In addition, 

it is true to say that commuting problems in the Western world are both a continuing 

nightmare for those that have to do the commuting and a serious threat to the environment. 

The BS concept, if widely practised, would help to reduce this problem. 

Finally, I would like to raise a subject that I have not covered in the earlier chapters 

but which is nevertheless fundamental to the BS concept. This relates to the marked difference 

in the number of IT professionals who may be available for work and those 

willing to take a conventional job. 

We are constantly being reminded from books, films, television programmes, etc. that 

over the last few thousand years great civilizations have been spawned in various parts of 

the world. Invariably, they have flourished for a time and then died. In these successful 

cultures of ancient times, an environment was created either by accident or design, and 

for perhaps just a brief period of time, that allowed far more people than normal to get 

involved, contribute and prosper. However, the key factor for success was usually some 

form of slavery imposed on most of the population. 

When the industrial revolution dawned in the later 

part of the eighteenth century, success was largely dependent 

on a new type of slavery – wage slavery, which was 

usually considered preferable to the alternatives on offer. 

Until very recently only a small percentage of the world’s 

population were in a position to indulge in developments 

that could really improve the standard of living of their 

families, their locality and the world community as a 

whole. As each new community has been offered the 

opportunity to embrace wage slavery it has usually been 

gleefully accepted.


Historically then, the ideal environment for the development of human commercial 

creativity has come about only on those occasions when both a climate of opportunity 

has been present and sufficient individuals with the necessary skills have been encouraged 

in some way to take up the opportunity. 

There is no doubt that thanks to the development of the PC and modern communications 

techniques, the opportunities for technology and business creativity are open to 

more and more people with every day that goes by. Equally, the number of people obtaining 

the necessary basic skills in order to avail themselves of the opportunities is increasing 

day by day. Nevertheless, the skill shortage, which is a key factor in the competitiveness 

problem, remains with us. It remains a problem because the people obtaining these skills 

increasingly do not want to conform to the conventional work pattern. In effect they are 

not willing to pick up the opportunity in the form it is offered. IT specialists are probably 

the first major group of workers who are in a position to refuse wage slavery. 

People involved in IT recruitment over the years are well aware of the marked decline 

in the number of IT specialists who are now willing to relocate. Why should they when 

they can be reasonably sure of a similar job becoming vacant within their own locality in 

the short term True, they might have to work as a contractor on occasions, but they will 

put up with this and any related travel due to the fact that, in a way, they are working for 

themselves and because they recognize the more contracts they do, the more experience 

they get. As they are constantly being made aware, every other day somebody with only 

comparable skills to their own will become rich simply because they were in the right 

place at the right time. In such circumstances few experienced IT professionals worth 

their salt are going to be satisfied with an ordinary 9 to 5 job in an organization that does 

not specialize in developing technology. 

As a breed the IT specialists have always appeared different from other professionals. 

Now I find that the younger IT specialists, both male and female, feel and act differently 

in other ways. Quite often they express a collective desire to adopt green issues and codes. 

A great many of them don’t want to commute long distances daily and they don’t want to 

work for organizations they find ethically unsound. Equally, they are not very keen on 

working full time for some organization that they consider boring when they can earn 

sufficient money for their needs on part-time work or taking on a contract once in a 

while. Many people will feel that this is an irresponsible attitude, but why take a permanent 

job when by taking the part-time contract route you can earn as much money for 

fewer hours worked and yet end up with a much more impressive CV 

I believe that the BS concept offers an ideal carrot and challenge for most IT specialists, 

both young and old. During the industrial revolution the opportunity was there for a 

large number of creative people to make themselves rich and to create work and further 

opportunities for others. These opportunities were taken up at an amazing rate for the 

time, but it was noticeable that the most creative companies produced the most new 

entrepreneurs. It is equally noticeable that the companies currently at the cutting edge of


technology tend to produce most of the people who go on to become technology entrepreneurs 

in their own right. In part this may be because they have employed high quality 

people, but it is also because in most cases, some form of equity has been available, as a 

carrot, for outstanding work. 

Go on – create a BS programme and give yourself and the other would-be entrepreneurs 

a chance to get a firm grip on competitiveness and at the same time provide a boost 

to your local community.

appendix a 

starting the outsourcing process 

Finding a suitable partner by 

creating a competition 145 

Creating an RFP and dealing 

with the providers 148

starting the outsourcing process 145 

Once the client has taken the decision to outsource, there are certain pitfalls that it must 

understand and avoid in its search for the ideal outsourcing relationship. The aim of this 

appendix is to highlight these pitfalls and suggest a step by step route to overcome them. 

It is assumed that the client organization wishes to create a competition between potential 

service providers for its outsourcing business. 

Finding a suitable partner by 

creating a competition 

In order to create a competition it is necessary to establish which outsourcing service 

providers appear to be suitable partners and then make arrangements to contact some or 

all of them. 

The established method of dealing with a range of potential suppliers of technology 

and knowledge systems is to send out Invitations to Tender (ITTs), or Requests for 

Proposals (RFPs). 

Over the last decade or so an accepted methodology has developed for structuring 

these requests and this is normally adhered to when sending out outsourcing RFPs. 

Typically, the suppliers are asked to explain how their service will deal with each of the 

requirements specified. In creating the RFP, care is taken to structure the way the answers 

will be provided. In this way the writers hope that when they get the information 

requested, they will be able to compare each provider’s offering ‘like with like’ and create 

a ‘level playing field’ to facilitate future decision making. 

In theory, the use of RFPs can overcome some of the initial problems faced by companies 

wishing to outsource. It should enable the potential outsourcer to give its own 

explanation, in as much detail as it thinks necessary, of its requirements and expectations 

from an outsourcing arrangement. This document may then be sent to a number of 

potential service providers, thus establishing an element of competition. The additional 

advantage is that the competing service providers should have all the information they 

need to create their bids without each sending their own fact-finding teams to repeatedly 

disrupt the potential client’s staff. 

However, the RFP is a tool that must be used wisely if it is to produce the desired 

effect. It frequently happens that a great deal of effort is taken up in preparing an RFP,

146 


the RFP is a tool that 

must be used wisely 

if it is to produce the 

desired effect 

which then fails to produce the desired response from 

potential service providers. Very often this is due to two 

main causes – too much detail was included and the service 

providers were not approached correctly. 

Clearly, it is important to get the right amount of 

information in the RFP and this must be set out in a way 

that maximizes the possibility of an accurate response. 

Unfortunately, it is often mistakenly assumed that the right 

amount of information is, quite simply, as much as possible. It is not unusual for an outsourcing 

RFP to take months to prepare, when it might well have been better prepared in 

just a few days. 

Often, an over-detailed RFP stems from the desire to ensure that service providers 

have absolutely all the relevant information in one document, in order to prevent them 

all from visiting the site to talk to the staff and take up the potential client’s time. It is 

essential that the providers be given all relevant information. However, too often, the 

client’s staff resorts to taking paragraphs from existing reports and documents in order to 

‘beef’ up the document. As a consequence, RFPs sometimes contain extraneous information 

that confuses the potential bidders. The clients must not only remove all extraneous 

matter in developing the RFP, they must search for ways of getting the information over 

using as few words as possible whilst ensuring that the statements are not misunderstood. 

It is in both parties’ best interests that the correct level of information is included in 

the RFP. For a single function outsourcing an adequate RFP might cover no more than 

30 to 60 A4 pages with the description of each process taking up no more than two 

pages. It is only going to be possible to get an ‘indicative’ bid in response, but this is the 

maximum anyone can expect from an initial proposal and an indicative bid should be 

sufficient for the client organization’s purposes at this early stage. 

The poor approach problem stems from the fact that these RFPs are often sent to 

potential service providers with very little prior warning and preparation. The combined 

result of too much confusing detail and too little contact is that the service providers may 

actually be reluctant to respond to the RFPs. 

What prospective outsourcers frequently fail to take into account is the amount of 

time and effort necessary to produce a bid in response to their overly-detailed RFPs. 

Major providers will have specialist staff dedicated to dealing with RFPs but even for 

them, more effort will be needed for responding to a one-off outsourcing RFP than to 

typical software ITT. For outsourcing service providers, the RFP may require too great an 

investment of time on the part of senior management and valuable staff to justify making 

a bid unless they have a reasonable expectation of success. 

The provider needs to believe, firstly, that the prospective client is reasonably likely to 

actually carry through its stated intention to outsource and, secondly, that it is competing 

on a level playing field against an acceptable number of rivals. Providers generally seem


happy with their chances if they are one of three rival bidders, but become doubtful 

about the odds if the RFP is sent to many more than that. 

A wise potential outsourcer will do well to narrow down the choice of service 

providers in advance by researching the suitability of those in the marketplace. It should 

then approach the chosen few before sending out the RFPs in order to assure them of its 

intention to judge the bids fairly and, except in unforeseen circumstances, to go through 

with the outsourcing. 

Experience shows that an excessively detailed RFP, representing a great deal of work 

for respondents competing against a large field of known competitors, will cause many 

service providers to either decline to bid or to prepare a far 

more simplified response than the client wished for. 

Clients often fail to anticipate these problems because 

they have relied on their experience of producing invitations 

to tender (ITTs) for software suppliers and the like. 

In theory, software vendors will always be happy to receive 

an ITT; they get much of their business from this source 

and will have staff dedicated to the task of responding 

speedily and accurately to ITTs. In addition, almost all 

in theory, software 

vendors will always 

be happy to receive 

an ITT 

organizations setting up a project to assess their software requirements will, in the end, 

purchase new software from one source or another. A software vendor responding to an 

ITT that had been sent to a total of five companies would, therefore, assume that its 

chances of making the successful bid were a healthy 20 per cent. 

It follows then that if the client has been careful enough to restrict the request to companies 

whose software ought to provide a ‘fit’, then there should be a good response. To have a 

20 per cent chance of obtaining a substantial contract and having the staff available to deal 

with such requests would appear to provide all the justification necessary to ensure that the 

software vendor will always respond eagerly and carefully. However, in practice, expectant 

software purchasers sometimes find that some vendors do not bid at all and others complete 

the templates in the easiest way open to them without going into the detail requested. 

If a detailed RFP is sent to five potential outsourcing service providers with little or no 

prior contact, then they are almost certain to respond less favourably than their counterparts 

in the software industry. For a new IT outsourcing, each provider will probably 

estimate the chance of a contract ever being signed at a maximum of 75 per cent, but for 

non-IT areas the estimate may be as low as 40 per cent. In these circumstances, the 

provider can be excused for thinking that the statistical chance of success could be as little 

as 8 per cent even if they start on equal terms with the competition. Given this situation 

any provider who gets the RFP out of the blue will naturally be reluctant to respond. Not 

unnaturally, they assume that the potential client must be in discussions with at least one 

provider and consequently they have been included to make up the numbers.

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Creating an RFP and dealing with the providers 

If, despite the drawbacks involved in outsourcing, an organization still feels that it is the 

most appropriate course of action to follow, there are steps that can be taken in order to 

improve the chances of a successful outcome. The method described in the following 

pages is intended as an example of good practice which may help to cut down on the 

risks whilst maximizing the service level and savings to be obtained from an outsourcing 

arrangement. This step-by-step procedure is a development of one first published in 

1996, in Outsourcing the Finance Function by J. Brian Heywood, Accountancy Books 

Group, Institute of Chartered Accountants for England and Wales. 

First step: collecting the basic information 

An organization that ensures that it has all the relevant information before beginning discussions 

with service providers is likely to save in time and effort and gain in terms of 

credibility with those it wishes to deal with. When management consultants are brought 

in to advise on the outsourcing process, the wise client will find that there are fewer costs 

involved in assigning its own staff to gather the basic information rather than leaving it to 

the consultants to collect. The information should, therefore, be gathered before consultants 

get involved. 

The information may be divided under a number of headings, as follows. It should be 

noted that only information which is strictly relevant to the initial discussions needs to be 

divulged to potential service providers at this stage. The RFP should not contain more 

information than is required for constructing a bid. 

The required information 

Staff numbers in the functions to be transferred – in practice, only about 

90 per cent of people will usually end up being transferred, with the 

remaining 10 per cent being the top management levels in the function, who 

will remain with the client. At this earliest stage in the assessment, however, it 

is a good idea to base assumptions on the highest number of staff who could 

be transferred. It is important to include all the people necessary to perform 

the functions concerned, including any short- and long-term contractors. 

From this it will be possible to gauge the number of full-time equivalents 

involved. It should not be necessary to pass on the information about total 

staff numbers until the choice of service provider has been made and a strong 

indicative bid received from the successful one.


Chart each process – create a breakdown of the number of staff who have an 

input into each area and the amount of their time thus used. 

Management and location of each function – this should include a description of 

the management reporting structure in each area. Also, a note should be made 

of any important points related to the locations, such as any property held on 

a different basis from the majority of the organization’s buildings, for example 

a short-term rental arrangement. 

Explain the service currently being delivered – e.g. for an accounting function it 

might be important to outline the output by ledgers, reports, transaction type 

and quantity with any marked seasonal variation. It will also be important to 

provide the current performance levels and the real trend in performance 

levels. For a marketing and sales function it might be necessary to summarize 

the size of the market being targeted over a reasonable time period, and show 

how market share had changed. It would also be necessary to briefly explain 

marketing/sales tactics and to explain how and why they differed from the 

main competition. 

The IT area – it is useful to include a summary of IT if it strongly influences 

other functions that are being outsourced. The required information will 

include equipment by number and type, number 

of PCs, main software used and networking 

details. It will also be necessary to explain special 

services provided to internal and external users, all 

projects, either under way or planned and give a 

description, including the condition, of legacy 

systems. If there is any pressure for major change, 

then it is worth noting where this pressure is 

coming from and what changes are suggested. If 

any functions or processes are already outsourced, 

these should be noted, along with any problems 

with the existing service providers that are 

anticipated. 

if there is any 

pressure for major 

change, then it is 

worth noting where 

this pressure is 

coming from and 

what changes are 

suggested 

Alternatives – details of alternatives to outsourcing which have been or are 

being looked at. 

Give background details on the company – an overview of the company origins, 

culture and current status, including ownership, number of employees and 

market share, with any anticipated changes.

150 


What is the reason for considering outsourcing at this time – is the reason strategic, 

such as a desire to outsource non-core functions in order to spend time and 

effort on the core business, or tactical, for example, a cost saving exercise. 

Joint venture possibilities – is there any chance that software or other 

products could be developed for sale to third parties as they are being 

created for use in house 

Anticipated contract length – clients should give their expectation of the length 

of contract they would be willing to award, along with the anticipated timing. 

The limits of service provider involvement – for the functions to be outsourced, 

the client should consider where it believes the line should be drawn between 

the responsibilities that it wishes to retain and those to be passed to the service 

provider, i.e. those processes in and out of scope. At this early stage in the 

proceedings, it will not be necessary to give potential service providers more 

detailed information other than which of the main processes fall on either side 

of the line. Quite frequently, service providers will convince the client of the 

desirability of including additional processes within the outsourcing scope, but 

that’s another matter for a later time. 

Second step: begin a dialogue with the providers 

The first and second phases of the process, before the RFPs are sent out, are often not 

seen as particularly important by the potential client. However, if some thought is given 

to preparing the ground in advance with the service providers, the final arrangement is 

likely to be more satisfactory. 

The first task is to decide on the providers to be approached. Ideas on finding the 

organizations are explained in the main body of the book. 

If the client feels that it would not be in its best interests to disclose its identity in the 

short term, then outside facilitators will be needed to make this initial contact. However, 

in most cases, by dealing with the provider’s senior management and stressing the need 

for security, the client should find that it is afforded sufficient confidentiality. 

It is important to make contact with the provider’s most senior people first to establish 

ownership. All other things being equal, a ‘sales opportunity’ passed down by the CEO is 

more likely to remain of interest than one that is passed up the management chain. It will 

be obvious, at this point, that the information given to the providers must be couched in 

terms that make them keen to compete for the contract. 

Another main aim is to establish the suitability of each provider, in order to narrow 

down the field of competition. Those chosen should represent a good match for the


client’s culture, as well as having a thorough understanding of the functions to be outsourced, 

the technical ability to achieve the desired improvements and a healthy urge to 

win and perform the work on offer. 

The client must therefore realize the importance of the first contact with the provider. 

In a nutshell, the provider’s initial aims will be to establish how likely the potential client 

is to eventually outsource; how valuable a client it will be 

and the degree of competition intended. For their part, the 

client’s representatives must try to establish the suitability a provider is far 

of each provider on the basis of culture match, understanding 

of the functions to be outsourced, ability to bring confidence in a client 

more likely to have 

about the improvements envisaged and how hungry it is 

who even during this 

likely to be for the work on offer. 

pre-RFP period is 

This should illustrate the importance of making 

advance contact with the providers in order to ‘warm them able to answer the 

up’ ready to receive the RFP. The client should take pains questions and back 

to reassure each potential provider of the sincerity of its them up with figures 

intentions to outsource, its value as a potential client and 

that the competition for the contract will be fair and open 

to no more alternative providers than is reasonable. 

At this point, the providers will not yet have received the RFP but the client will nevertheless 

reap the rewards of the work carried out in Step 1. Although they will have been 

asked to wait for the RFP, the providers will usually have many questions to put to the 

client before receiving the RFP. Experience would suggest that these questions should be 

tolerated to some extent and every effort made to develop a warm relationship. A provider is 

far more likely to have confidence in a client who even during this pre-RFP period is able to 

answer the questions and back them up with figures. For tactical and competitive reasons, 

however, it is normally acceptable to give transaction details but not manning levels. 

The typical provider will naturally assume that the potential client who has all the 

information available ‘at its fingertips’ has put substantial thought into the outsourcing 

process and is, therefore, likely to see it through. A provider who gains respect for the 

client at an early stage is likely to proceed happily, expecting that this helpful efficiency 

will continue during the pre-contract and transition periods. 

It is never necessary to provide detailed figures to the providers at this stage, so most 

clients should have few qualms about answering their questions. For example, questions 

on the extent of the general ledger activities are best answered with annual figures for 

accounts, cost centres, inter-company transfers, entries and accruals, and the number of 

cost/profit centres and a description of the reporting process will normally suffice when 

information on reporting analysis is sought. 

This pre-RFP period is not always afforded much thought by the potential client, but 

if it handles these initial approaches well, then it will have gone a long way towards 

achieving a good outsourcing arrangement.

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Third step: developing the RFP 

It must be remembered that the competition induced by sending out RFPs is in the client’s 

interest but not necessarily in that of the provider. If the only difference between two 

prospective clients is that one is offering a sole sourcing arrangement and the other is seeking 

to pick a provider by means of competitive bids, any provider will choose the former. 

Competing for outsourcing work is a costly business, in terms of both time and 

money. If a potential client is large enough, most providers will still choose to bid even if 

they do not rate their chances particularly highly. Over time, though, it is likely that the 

costs involved in bidding will drive providers to reconsider these tactics even when major 

potential clients are involved. It may be, for example, that competing is only cost effective 

if the success rate is at least one in three. In that eventuality, it may be decided that 

competing for any contract with more than one other provider will not make sense, as 

even if they win as often as the competitors do, on one in three occasions the outsourcing 

may not go ahead at all. 

The ideal number of providers to whom the RFP should be sent is never likely to be 

more than three or four. By engaging in discussions with a range of available providers in 

the initial stages, it should prove possible to limit the field to a few suitable ones who are 

likely to respond to the RFP in the way the client wishes them to. 

The RFP should contain a mixture of general and specific information so that the 

providers can make a bid without recourse to additional sources of information. Bearing 

in mind the danger of too much information being presented and the fact that an experienced 

service provider will in theory be able to make a reasonable indicative bid from the 

transaction details alone, the following has been known to suffice. 

the RFP should begin 

with a brief 

description of the 

client organization, 

including its history, 

recent trading 

situation and current 

ownership 

Introduction to the company 

The RFP should begin with a brief description of the 

client organization, including its history, recent trading situation 

and current ownership. If there is any likelihood of 

acquisitions or sale of business units with any bearing on 

the functions to be outsourced, then that should be 

explained in this section. In addition, details should be 

given of the process to be followed before approval can be 

granted for outsourcing. One or two A4 pages should 

probably suffice for this information. 

Background leading up to the RFP 

This should include a description of the functions to be outsourced, with any additional 

relevant information such as the age and effectiveness of the systems in use. It will also be 

worth explaining the triggers that lead to consideration being given to outsourcing in the


first instance. From these, the client’s expectations of an outsourcing arrangement may be 

better understood. 

Details should be given of any projects, current and planned, relating to the functions 

to be outsourced or which may have an indirect effect on these functions. 

Confidentiality 

In some cases, clients ask potential providers to sign confidentiality statements before 

they receive the RFP. Others may include a confidentiality form with the RFP, with a 

request that it is completed and returned as soon as possible. 

The basic processes 

In order to ensure that time is not wasted while providers gather further information 

from the client, each process must be described accurately and in some detail, but not in 

so much detail that the provider is held up by the need to plough through unnecessary 

description. For basic processes, there is unlikely to be a need for more than one to three 

pages of explanation. 

Objective or purpose – the main reason for the existence of the process or 

function, e.g. in describing an accounting process it might be to obtain 

monies due or provide information on trade debtors. In a marketing function 

the objective or purpose might be to achieve targeted sales. 

Included in the scope – a list of the processes to be outsourced. 

Outside the scope – a list of the processes to be retained in house. 

Transaction details – normally these need only be shown on a per annum basis, 

therefore in the finance area it might be sufficient to state the number of live 

customer accounts, number of invoices, number of credit notes, etc. For a 

marketing and sales function it is normally sufficient to detail the number of 

annual sales emanating from the various sales channels. However, if the 

function is subject to marked seasonality, such as 40 per cent of sales or 

invoices happening in the immediate pre-Christmas period, then this will have 

to be adequately explained. 

Strengths and weaknesses of existing systems – this section should describe the 

feeder systems, any manual input, file maintenance and the various outputs. It 

is important that the weaknesses should be explained truthfully in detail. 

Current working practices – if there is any additional information that will help 

to describe how the current service operates, it should be given here.

154 


New system requirements – the client’s hopes and expectations of the effects of 

the outsourcing arrangement on services, including a time scale for achieving 

the desired improvements. 

Timing requirements 

It will be necessary to determine a timetable for the completion of projects to be carried out 

in the transitional period. This should be fully described in the RFP, ensuring that there is 

no room for misunderstanding these timings, especially in the case of critical projects. 

IT strategy 

The outsourcing of a function such as finance or distribution may require new systems to 

be created by the service provider. Such systems are unlikely to be entirely stand-alone 

and may require the creation of new interfaces with the systems operating in other functions. 

The overall IT strategy of the client organization is therefore of great interest to the 

potential service provider even when a function other than 

IT is being outsourced. 

the overall IT strategy 

of the client 

organization is 

therefore of great 

interest to the 

potential service 

provider even when a 

function other than IT 

is being outsourced 

Critical success factors 

One to two pages will probably be required for a detailed 

description of the client’s overall IT strategy. There should 

also be some idea given of the progress made towards completion 

of any current projects, for example, where the client 

organization is in the process of moving to an ERP solution. 

If there are any factors in the current IT strategy and policies 

which may have the effect of setting limits on the actions the 

provider might wish to carry out in respect of other functions, 

then these should be explained in detail. A description 

should also be given of the prevailing standards, to which 

the provider will be expected to adhere. 

It is worth bringing the critical success factors together under one separate heading, 

although they will probably be detailed elsewhere in the relevant parts of the RFP. 

Transfer of staff 

It is vitally important that the transfer of staff is handled properly and according to the 

relevant regulations. Each party must agree from the start on what share of the responsibility 

it will be taking. The client should set down its expectations as to when its 

responsibilities will end, preferably also giving details of its normal redundancy package.


Ideally it should set a date, which may or may not be the end of the transition period, 

after which the provider will take responsibility for redundancies. 

Transitional arrangements 

A separate heading in the RFP will be required if the client wishes to specify any essential 

conditions regarding the apportionment of costs during the transitional period. 

The RFP should also include the following items. 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

The required contract period – for a first contract this should not normally 

exceed five years. If a provider wishes to base its bid on a different time period, 

then it will need to fully justify this deviation from the RFP. 

A requirement that staffing levels and costs should be quoted in terms of the 

basic processes as well as for the overall service. 

A requirement that costs should be provided for each year. 

A request that the bids should include the amount of input, in working days, 

that will be required from those staff retained by the client, during the 

transitional period. This factor may significantly affect the cost-effectiveness of 

the different bids. 

A request that the transition costs, broken down into the periods to which 

they apply, should be shown separately. 

A request that any system development costs should be detailed in a 

similar manner. 

A request for background information on the service providers themselves. 

The client will wish to consider how the culture, people, locations and 

relevant experience of the providers fit them to work with its own 

organization. 

A request for details of the providers’ experience of TUPE or other relevant 

regulations and transferring staff. 

A request that the providers’ methods of operating fixed price and partnership 

type contracts should be explained, together with their preferences for either 

of these. 

A request for details of the providers’ personnel policy with regard to their 

own staff and for a statement as to whether transferred staff would be covered 

by the policy.

156 


Other points 

If the client will require the service provider to perform any major additional tasks, such 

as the creation of new systems, these should be described in the RFP in sufficient detail to 

allow the providers to be able to produce an indicative bid. 

Different situations will require different ways of dealing with the question of when or 

if the providers should take over property or equipment and, at this stage, it may not be 

necessary to raise the issue. 

The providers should be asked how they would deal with unforeseen but nevertheless 

common problems such as the mid-contract sale of either service provider or client and 

future acquisitions and divestitures by the client. Often both parties enter an agreement 

without this issue ever having been aired. Sometimes it is discussed but both parties agree to 

meet such problems if and when they happen. Experience would suggest that leaving this 

subject to chance is a mistake when an appropriate clause in the contract will at the minimum 

provide a framework in which to renegotiate the 

relevant parts of the arrangement. 

the RFP should make 

it very clear that the 

decision to outsource 

will depend on the 

price quoted and the 

risks being satisfied 

The RFP could contain a template, to assist the service 

providers in composing a response to the RFP that meets 

the client’s expectations. Otherwise, the desired format and 

contents of the response should be explained clearly. 

The RFP should make it very clear that the decision to 

outsource will depend on the price quoted and the risks 

being satisfied. 

Fourth step: help the providers with their bid 

The RFP will give a closing date for the submission of responses. However, whilst the bids 

are being prepared, the client would be best advised to maintain contact with the providers. 

It may be that information has been missed out of the RFP, or that certain clauses have 

been worded badly. A client who talks to the providers as they are evaluating the RFP will 

be able to spot such problems and clear up any potential misunderstandings before the 

bids are finally delivered. In addition, it is always worth ensuring that the relationship 

with the successful service provider is given the best possible start. Contact and assistance 

at this stage in the proceedings can help to ensure that the eventual agreement begins in 

an atmosphere of mutual respect and goodwill. The client must, of course, be scrupulously 

careful to ensure that no help or additional information is given to one provider 

without also providing the same information to all the others. 

This is also a good time to assess the question of culture and chemistry compatibility. 

Even though contact between client and service provider staff may have been limited, it is 

still worth beginning an internal dialogue to establish how comfortable the relevant client


managers are with the competing providers. If this information is documented at this 

point it will be of great help later during the short list negotiations stage, to determine 

which, if any, of the positive and negative views are really justified. Obviously an outsourcing 

arrangement is going to work much better if the individuals in both 

organizations are comfortable with each other and their aims are compatible. Some service 

providers are so sensitive about this that they make a point of telling all potential 

clients, at least twice during the first contact, how fortunate it is that the two organizations 

have a perfect culture match. 

Fifth step: evaluating the bids 

Ideally, all the providers will have responded to the RFP, having been helped by the 

efforts of the client to make the process a straightforward one. However, in practice, some 

bids will be lacking in certain detail. If this is the case, it should be possible to request 

additional information to fill in the gaps and ensure that the responses can be judged on 

all the relevant criteria. It is unlikely that any provider will refuse to supply such information, 

having put in the necessary effort to reach this stage of the proceedings. 

Sixth step: getting close to a decision 

In some cases, even at this stage, when it has competitive bids from two, three or more 

potential service providers on the table, the client is still considering whether to outsource 

at all. Assuming that the bids suggest that there is something to be gained from doing so, 

most clients will proceed at least a little further. Where there is any suggestion that a service 

provider will be able to offer an improved service at a reduction to the current cost, 

then the client must have a sound justification if it chooses not to follow up this option. 

Although it is difficult to argue against the logic of creating a competition, there are 

dangers if the competing providers are not handled correctly during the bidding process. 

To start with, it will be natural for the bidders to assume that price is likely to be the key 

factor. They will know from past experience that it is often the only consideration, whatever 

the client has previously indicated. 

Therefore, if long-term competitive advantage is the real aim it will be necessary to 

ensure: 

● 

● 

that the people evaluating the bids are not overly influenced by the price factor. The 

important consideration should be ‘How will each of these bids affect our 

competitive situation in each of the years covered by the contract’ 

that the quality of the service, long-term competitive advantage and desire to create a 

successful relationship between the parties are stressed as the key elements at all times 

when negotiating with the bidders. There are good tactical reasons for playing down 

the importance of price at this relatively advanced state in the negotiations.

158 


if the emphasis has 

been too strongly 

placed on the money 

issue, the effect on 

the winning provider 

may be quite 

negative 

The importance of these two points should not be overlooked. 

All too often, the short-listed bidders are left with 

a final impression that cost is everything. In the circumstances 

there is a tendency for the providers to cut the 

projected fee a little more because they have already spent a 

great deal of time on the project. Quite naturally this will 

affect the quality of service they intend providing. If the 

emphasis has been too strongly placed on the money issue, 

the effect on the winning provider may be quite negative. 

The lasting impression will probably be that they only won 

the deal because they bid too low, so they will immediately 

set out to correct the situation. It is worth noting that the person managing the project 

for the successful provider will be judged first and foremost on the profit produced.

appendix b 

before contemplating the 

outsourcing transition 

The need to plan 161 

Service level agreements 163 

Service performance measures 165 

Continuous improvement 

to the service 166 

Management of the contract 167 

Other factors worth considering 

prior to the transition 169 

The service provider finally 

assumes control 170

efore contemplating the outsourcing transition 161 

The need to plan 

Before the transition gets underway it will be essential for each step of the transfer to have 

been planned in detail and every effort made to ensure that the staff, both those retained 

and those to be transferred, know what is expected of them. The contract will have been 

finalized and signed and any necessary pre-contract consultancy and other fact-finding 

work completed. 

The transition relates to the period of time necessary to complete all the changes 

required before the transferred function or functions are finally placed under the direction 

of the service provider or joint venture management. Prior to the transition, the 

client’s staff will have carried out the entire workload, but by the end of the transition the 

ongoing work will be carried out by the new team. In a conventional outsourcing 

arrangement the transferred staff make up around 80 per cent of the new team with some 

long-term additions or changes of personnel made by the provider. 

In some outsourcing arrangements though, the transition is completed in distinct 

phases, which effectively result in responsibility being transferred before all the planned 

changes are completed. This can occur when a project area within the scope of the relevant 

functions is not considered a major contributor to service improvements or 

substantial short-term savings and both parties agree that work on it can be safely postponed. 

However, it is most likely to happen when part of the overall project is dependent 

on some other work being completed, which is outside the provider’s control. Both parties 

should agree on a risk management plan in advance of the transition if there is a real 

risk that progress might depend on the successful completion of projects outside the 

provider’s control. 

When a provider believes that there are major factors that it cannot completely control, 

it will naturally become concerned that problems of someone else’s making could 

occur before or during the transition. Service providers faced with such a situation usually 

request that the client accepts responsibility for all the costs up to the end of the transition. 

Clients forced to accept this request frequently end up paying the provider a 

management fee to cover its own costs up to the end of the transition. Clearly, when 

these circumstances prevail, the contract will normally only come into being once the 

transition has been completed. In most other circumstances the contract is effective from 

the start of the transition. Pre-transition work is normally covered by an agreement for 

consultancy services.

162 


Outsourcing an important function is a major step for any organization, particularly if 

it is contemplating such an arrangement for the first time. In truth few organizations 

begin discussions with service providers believing that outsourcing is the only likely 

option or outcome. The service providers are well aware of this and fully realize that even 

though they may have responded to an RFP and made follow up presentations, outsourcing 

may still be one of several options being considered by the potential client. 

From the point where outsourcing becomes a serious option the client will be constantly 

trying to balance the benefits and risks involved. 

The very fact that outsourcing is such an important step to take, makes a strong case 

for suggesting that the decision should not be made in haste. With that in mind it is 

often a good idea to create a ‘breathing space’ before the service provider is given the ‘goahead’. 

If advisers are involved, their opinions should certainly be sought but the final 

decision ought to be made at least a week after they were last seen to allow key internal 

staff time to develop their own independent views. 

However, once outsourcing becomes the preferred 

option and at least one provider has been isolated, then the 

once outsourcing 

becomes the 

preferred option and 

at least one provider 

has been isolated, 

then the preparation 

to outsource should 

begin very quickly 

preparation to outsource should begin very quickly. 

Independently from its chosen service provider, the client 

should begin to map out certain key areas in detail. In 

these key areas it will be necessary to evaluate and re-evaluate 

the requirements and timing on a regular basis before 

the contract is signed. 

If the client makes little or no preparation prior to 

finalizing the decision to outsource with the chosen service 

provider, then it will always be playing ‘catch-up’ with an 

organization that starts off being much more knowledgeable 

about the subject. This appendix, therefore, 

concentrates on the pre-planning work that should ideally be done before a successful 

provider is chosen and at the same time goes into more detail about some of the more 

technical aspects of outsourcing that are only briefly covered in the first part of the book. 

It has been suggested to me on more than one occasion that it ought not to be necessary 

to do pre-planning work of this type. ‘Surely if we are going to put so much trust in 

this service provider why can’t we just let them get on with it and tell us what they want 

from us’ This is best answered by considering the treatment of transferred staff – an area 

where it is obvious that client and service provider will both be united in their desire to 

treat the staff fairly. It will certainly be in the provider’s interest that the client plays its 

part in keeping the transferred staff up to date with developments, but the provider may 

not have advised a client on this subject before and in any case it has its own problems. 

Although it is in the best interests of both parties that the employees are treated with 

respect it is still an area that the client must pay careful attention to. As stated earlier, a


client who alienates the transferred staff by its failure to plan ahead and keep all concerned 

fully informed, is taking unnecessary risks with the quality of the future service. 

It follows that the importance of pre-planning will be much more important for the 

client in areas where the aims of both parties do not exactly match. 

Some of these areas are considered below: 

● 

● 

● 

● 

service level agreements 

service performance measures 

continuous improvement programmes 

management of the contract. 

Service level agreements 

Service level agreements (SLAs) are the link between the specifications laid down in the 

contract and the delivery of the service. In essence they provide the basis of the legal 

framework under which the performance of the provider is measured. 

SLAs naturally vary according to the requirements of the various parties to the outsourcing 

arrangement. But in each case the quality of the service delivery will depend to a 

large extent on these factors. 

● 

● 

● 

● 

How well both parties have isolated and set down the really critical controls. 

Although agreement will be necessary, it will be apparent that the client must set its 

own agenda and not just leave it to the provider; 

In an appropriate risk/reward sharing arrangement, creating a dynamic, but flexible 

service that accepts that changes to the SLA are inevitable and a fact of life if 

maximum improvements are to be achieved. The ideal SLA for this purpose should 

concentrate on the service required rather than detailing the methods of obtaining it. 

Creating and laying down easily understood service 

control and service performance metrics. The wise 

client will attempt to look for continuous 

performance improvements and where possible 

build them into the service performance metrics. 

Setting up the required quality management and 

performance review processes. 

For each activity it will be necessary to agree both a standard 

of service and the critical performance indicators. It is 

for each activity it will 

be necessary to 

agree both a 

standard of service 

and the critical 


indicators

164 


important that the various processes are grouped into distinct service activities so that they 

can be dealt with separately and the performance measures can be directly applied to them. 

Each activity will need to be clearly defined. This will require a description of its purpose, 

the volumes involved and the service expectations. In effect the full process is 

described in sufficient detail to avoid the chance of confusion and misunderstandings. 

Similarly the service required should be given the same amount of attention to detail. The 

performance measures are normally tasks and deadlines. In due course they will be compared 

against the contract standard requirements on accuracy and timing. 

It sometimes happens that client organizations reach the pre-transition stage having 

only recently carried out an exercise that has resulted in full descriptions of the activities 

to be transferred. Unless this exercise was done previously with outsourcing in mind, it 

will still make sense to draft out the desired service again and analyze the likely consequences, 

before starting in-depth discussions with the provider. Not surprisingly the 

minimum service tends to go up a few notches when outsourcing service providers are 

likely to be involved. 

The actual service level agreements produced will depend on the nature of the 

processes being outsourced, but typically they will cover the following areas. 

operational requirements – minimum communication needs, timescales, back 

up system requirements, security, etc. 

support levels – the minimum technical support necessary plus any 

improvements required, when they will take place and maintenance. 

changes in volume and type – how changes in volume and type of work are to 

be dealt with. 

the personnel – the structure of management, key responsibilities and quality 

levels of the important management roles. The number, skills, experience, etc. 

of other key staff should also be detailed. 

minimum service levels – this area is frequently limited to bare statistics, e.g. 

the service will be available 98 per cent of the time. Again, the wise client will 

give this considerable thought. The real aim should be to stipulate the 

minimum level without trying to tie the service provider down to an 

unreasonable level. 

a procedure for resolving disputes – it is very important that the procedure for 

dealing with disputes is laid down in terms that cannot be misunderstood.


Service performance measures 

Each group of users should be required to detail their service reporting needs. Ideally 

these users should start by documenting how this service has traditionally been achieved 

followed by the changes they now wish to see and the reasons for them. If advisers are 

involved they should be requested to independently document any changes or improvements 

they would recommend. Although this will involve a small amount of additional 

time and effort when compared to the combined project approach, it does allow senior 

management the opportunity to double check that errors are not made due to ‘too many 

cooks’ being involved. Although the service provider will eventually have a strong input 

to these measures, it makes good sense for the client to initially set out its own requirements 

so that there is a clearly documented statement of ideal service performance. 

Theoretically, it must be against the client’s interest if the service provider is allowed too 

great an input into these measures early in the proceedings. Nevertheless, it sometimes 

happens that the provider will independently suggest measures that favour the client 

more strongly than those originally suggested by the client. 

The individual activities in the SLA are normally all given their own targets. With 

risk/reward sharing arrangements these targets are often set, initially at least, on the basis of 

a modest improvement on what the client’s own staff have been achieving. Many such 

arrangements allow a reasonable period of time for the provider to make improvements 

after which penalties will apply if the target is not met and a sharing of savings takes place if 

they are significantly bettered. Clearly, these targets cannot finally be set without the agreement 

of the service provider. Despite this, it makes sense for the client to seriously consider 

targets, penalties and rewards before beginning the final planning stages with the provider. 

This is another area where it is advisable to seek help from the provider’s current clients. 

Quality assessments are necessary on a regular basis comparing the SLA and actual 

performance. Independent quality assessments might also form part of the agreement. In 

this scenario third-party consultants are employed at agreed intervals to do benchmarking 

studies. These studies are then used when necessary to adjust baseline service levels. 

Quality assessment exercises are useful in identifying those areas where the risk of failure 

is most acute, but they will often also illustrate areas where continuous improvement 

projects might be justified. Usually, quality assessment 

work does not begin until the provider gets involved. 

It goes without saying that all quality assessment and 

performance targets must be capable of being measured. 

These measurables can be ‘scored’ in terms of quality, 

quantity, time elapsed, satisfaction or any other measure 

jointly agreed as important by both parties. Achieving 

clearly understood measurables is not always a simple task. 

all quality 

assessment and 

performance targets 

must be capable of 

being measured

Sometimes the transition begins with the provider leading a joint project team seemingly 

intent on making one single leap towards complete competitiveness. ERP projects intended 

for completion by the end of the transition often come into this category. Common sense 

would normally indicate that something as major as an ERP project would be better left 

until the two parties had gained experience of working together. Against that, I have 

observed several outsourcing arrangements where the alternatives to a completely new integrated 

software system to begin the contract appeared even less attractive. 

In most outsourcing arrangements, however, one of the key aims of the transition and 

any pre-transition projects deemed necessary will be to identify both the service improvements 

that can be achieved in the short term and those that are better left to some future 

date. Typically the short-term changes will concentrate on improvements in reliability, 

speed and quality of the existing service while at the same time searching for cost reduction 

and rationalization opportunities. 

Risk/reward sharing or value added outsourcing arrangements will normally require the 

provider to look for opportunities to re-engineer and improve the service at regular intervals 

both during the transition and thereafter as new processes, interfaces, reports and greater 

on-line access to information becomes possible. Logically, though, the heavy workload experienced 

and the process of both parties learning to work together means that improvements 

first isolated during the transition are usually implemented much later. 

Many of the highly publicized added value success stories in outsourcing have come 

about because of continuous improvement programmes created sometime after the con- 


In fact, it is sometimes very difficult to measure factors like quality and accuracy. 

Nevertheless, the metrics built into the SLA must be as devoid of alternative interpretation 

as possible. To achieve this aim it is essential that these metrics are put together by 

both parties. If there is still any chance of misunderstanding, appropriate ‘notes’ or 

‘schedules’ should be made to the SLA. These changes will be legally binding under the 

contract and will have to be agreed by both parties, but they can occur at any stage in the 

life of the contract. 

Ultimately, both parties will need to agree on a timetable to take the service from the 

pre-transition stage to the baseline service stage – usually the first day after completing 

the transition. If the client has done little or no work in defining and scoping the service 

until the transition starts, then it will have to work considerably harder over the following 

months than it might otherwise have done. More importantly, it is very likely that all this 

work will need to be under the direction of the provider in order that a reasonable timeframe 

can be achieved. 

Continuous improvement to the service


tract got under way, i.e. the actual improvements were not anticipated prior to or during 

the transition. The existence of this knowledge has led some client organizations to feel 

that if they create the right risk/reward-sharing environment for the providers to work in 

then it is not an area that needs exercise their minds in the short term – certainly not 

prior to the transition starting. 

Unfortunately, there are certain aspects relating to continuous improvements in the 

future that the client organization has to consider very seriously and as early as possible in 

the pre-contract period. This is because continuous improvements are unlikely to all start 

and end conveniently within the confines or boundaries of the function being outsourced. 

It is possible to imagine all manner of out of scope problems that the provider might face 

when contemplating future improvements. Related areas may have already been outsourced 

to one or more different providers and these other providers or other internal departments 

may be proceeding along entirely different agendas with new projects planned or under 

way. Obviously, a new provider is unlikely to take on a function without previously establishing 

who has control of the related functions. However, potential confusion in the out of 

scope areas may not be sufficient to stop the provider going ahead with the basic contract. 

In other words, just having the contract with only the possibility of sharing future savings 

may be sufficient reason for the provider to sign up for the arrangement. 

In these circumstances the provider may have entered the agreement with every intention 

of seeking continuous improvements providing that the client gets its house in order 

at an early stage after the contract starts. If the provider is prevented from bringing about 

further improvements due to factors in other related functions that it is unable to influence, 

then it can be excused for assuming that the problem lies with the client. After all, it 

does not have an unlimited supply of the specialists who bring about such improvements. 

Consequently, it only requires a few setbacks when attempting to bring about improvements 

to convince the provider’s management that the specialists could be better used 

elsewhere. It is possible that this change, in terms of reducing future creative effort, could 

come about without the client ever realizing it. 

Therefore, if it is seeking continuous improvements from an outsourcing arrangement, 

the client must analyze the potential for inter-department or inter-supplier co-operation 

and discuss its findings with the provider before the transition gets underway. Convincing 

the provider at an early stage that it understands these potential limitations and will do 

everything it can to correct the situation should help to create the right sort of environment 

for continuous improvements. 

Management of the contract 

Over the last few years a certain degree of standardization has developed in the way that 

the outsourcing contract is managed. Most often this involves a management team of

168 

Typically, the project manager for new systems will have been supplied by the provider 

and the project manager for the existing service by the client. 

The person managing the transition is often termed the Programme Manager. This 

person must be an experienced project manager used to managing a range of technology 

and other projects of major size and cost. The position will probably disappear after the 

transition is completed and this is one reason why the role is usually given to one of the 

provider’s most senior consultants. Logically, if the service provider takes leadership of the 

transition it will wish to make the Programme Management appointment from one of its 

own people. 

Once the transition has been completed, new management must be found to manage 

the ongoing contract. Typically, the provider will appoint its own contract manager and 

this may or may not be the person responsible for the service delivery. The client’s own 

contract manager can come from anywhere, in theory, but usually the job goes to one of 

the project managers involved in the transition. 

Client organizations should give early and serious thought regarding the person they 

choose to manage the existing service project during the transition. It is not unknown for 

the client to make this appointment from an executive it intended to retain after the tranthe 


over the last few 

years a certain 

degree of 

standardization has 

developed in the way 

that the outsourcing 

contract is managed 

equal numbers of client and provider executives on a joint 

review board or steering committee which meets on a regular 

basis during the life of the contract. 

The steering committee will probably come into being 

at the start of the transition. It will be apparent that normally 

the transition will comprise a whole range of special 

and probably ‘one-off’ projects to bring about the required 

changes. At the end of the transition new projects will be 

less frequent and take up a smaller amount of the available 

resources as the service beds down and something 

approaching normality returns. 

On occasions one person has successfully managed the transition and then gone on to 

do a perfectly adequate job for the duration of the contract. However, most people would 

argue that these are very different roles requiring people with different backgrounds and 

mental outlooks. The person managing the transition will actually be managing a number 

of separate projects such as: 

● 

● 

● 

● 

location change – which may involve creating a new infrastructure, purchasing and 

installing new equipment and relocating staff; 

counselling and transfer of staff including preliminary training; 

selection, installing and implementation of new systems; and 

the transfer, setting up and management of the ongoing service.


sition only to find that the circumstances have evolved in such a way as to make his or 

her transfer inevitable. 

The success of the ongoing outsourcing arrangement will depend to a large extent on 

the ability of the managers involved on both sides. It is, therefore, of vital importance at 

an early stage in the pre-transition negotiations to consider the range of skills, experience 

and personal qualities that are necessary to perform well in this position. The ideal ongoing 

contract manager will have: 

● 

● 

● 

● 

● 

experience of the functions concerned; 

the ability to feed the right level of information up and down the management tree; 

sufficient technical knowledge and common sense to anticipate problems; 

the ability to build relationships with the individuals involved; 

a genuine belief that the service can be continually improved. 

The steering committee will probably meet quite frequently during the transition, often 

once a month at first but probably less frequently thereafter. Overall the steering committee 

will be responsible for: 

● 

● 

● 

● 

● 

ensuring that the existing service is sufficient to meet the client’s needs; 

a continual analysis and review of the performances of both client and provider in 

order to stop potential problems from developing; 

approving the appointment or dismissal of key staff involved in providing the 

service; 

approving any changes necessary from the contract arrangements; and 

the overall performance of the management. 

Other factors worth considering 

prior to the transition 

● 

Experience shows that some transitions have been spoiled by unexpected problems 

related to the use of new facilities. Typically, this happens most frequently when new 

facilities are required close to the client’s existing facilities. In such circumstances it is 

natural for the client’s management to accept responsibility for finding these additional 

premises. However, management who are not experienced with the problems of 

finding and furnishing premises have often underestimated the time taken to complete 

such tasks. It would be unrealistic to try to allow for all eventualities and it will be

170 


experience shows 

that some transitions 

have been spoiled by 

unexpected problems 

related to the use of 

new facilities 

● 

clearly beneficial to both parties to complete the transition 

as quickly as possible. Nevertheless, both organizations 

would be wise to use the period just before the transition to 

make doubly sure that the timing agreed upon for all key 

issues is actually achievable. 

● 

Many clients see advantages if the end of the 

transition coincides with the accounting year end. 

Most service providers will try to abide by this wish if 

at all possible. However, the transition period already 

contains many risks for both parties, so care should be taken to understand all the 

ramifications of this or other ‘nice to have’ additions to the overall project. 

During the first few weeks of the transition both the retained staff and those being 

transferred will be working at a much more intense level than in the past, as they get 

to grips with problems relating to both the ongoing service and the new 

developments. Extra pressure and the need to bring about change usually increases 

tension between staff members during conventional internal projects. In an 

outsourcing arrangement, the added complication of one group of employees 

transferring to another employer is almost bound to add to the tension. In the 

circumstances both parties will do well to prepare all concerned for the problems 

that are likely to occur along the way and any client that assumes that it can safely 

leave these problems to the provider under the terms of the contract is asking for 

trouble. If the transition is not completed successfully a good proportion of the 

problems resulting will remain with the client’s retained staff. 

The service provider finally 

assumes control 

Typically, a month or six weeks after the service provider assumes control a certain ‘calm’ 

descends upon most members of the retained management and the transferred staff. 

However, difficult or easy the transition may have been, the majority of the client’s 

former employees could be excused for thinking that the situation is ‘returning to 

normal’. Given the circumstances they can be forgiven for being optimistic that job security, 

in particular, will be the norm from now on. Why not be optimistic The ongoing 

service will be carried out by people who were there before outsourcing was ever considered, 

and with fewer staff and specialists on hand the service must be efficient now and 

should remain so in the foreseeable future!


For those people that have transferred to the service provider there is the additional possibility 

that they have joined an organization that will achieve above average growth in the 

coming decades. Consequently the transferees from a non-core function will, on average, 

obtain greater rewards, job satisfaction and security than those who have not been outsourced. 

However, most of these rewards will only be available if they are able to achieve 

continuous improvement for the clients they work for. They are employed purely to provide 

a service and because that service represents their new employer’s core business it must be 

continually improved. The attitude adopted by the most up-to-date and creative providers is 

that they have to keep their clients’ service competitive and that can only be done by continuous 

improvements to the way they produce these services. Transferred employees are 

required to find new ways of making improvements and savings which in turn, in theory at 

least, puts pressure on their own chances of long-term employment. Any fears in this direction 

are, however, counteracted by the potential for taking on other clients’ work and the 

prospects for transferees to become specialists in their own right. 

Those employees who have been transferred in a risk/reward partnership arrangement 

will need to understand quickly what they are committed to. From the start of the ongoing 

period to the end of the contract, and probably beyond it, the service must be 

continually refined, updated and improved by: 

● 

● 

● 

● 

● 

continuous improvement programmes 

customer service improvement measures 

quality control programmes 

service performance reports and evaluation 

continued staff counselling, training and development. 

Towards the end of a typical transition, both parties usually become convinced they have 

too little time available to do justice to the relative importance of the projects being 

developed. The provider may be able to bring in additional key specialists on a temporary 

basis but the client is rarely in a position to make up lost ground so easily. The moral of 

the story is that the client usually needs to plan for the transition earlier and more efficiently 

than the provider just to arrive at the winning post at the same time. 

Finally, it is worth stating that the wise client manages and 

massages the contract until it comes to an end. It is of vital 

importance that every opportunity is taken to assist the 

provider to improve the service, but it is equally important 

that steps are taken to keep the provider ‘on its toes’. To 

achieve both these ends the following are worth considering: 

● 

involving end users in monitoring service delivery 

against targets; 

the wise client 

manages and 

massages the 

contract until it 

comes to an end


● 

● 

● 

working continuously on improving the relationship with all the provider’s staff; 

building in the right to review the relationship and contract at various stages along 

the way; 

making sure that you maintain the right to invite tenders for new consultancy and 

outsourcing work.

appendix c 

the essential elements of 

the contract 

The contract structure 175 

Key issues 176 

Details of the transition 181 

Termination of agreements 182

the essential elements of the contract 175 

It is in the nature of outsourcing arrangements that no two are exactly alike. In this 

Appendix we look at the range and type of issues that both parties to such an arrangement 

will need to address but it is not intended for use as the basis of a draft contract. 

The unique nature of each outsourcing arrangement should be incorporated into its own 

legal documentation. 

Another point to be aware of when drawing up an outsourcing contract is that there 

will usually be factors that cannot be quantified or measured until much of the transition 

work has been completed. Hence, many outsourcing arrangements begin with a qualified 

contract. For example, the initial phase of the work may involve studies into issues such 

as the SLAs, the baseline charges and the method of calculating the risk/reward elements, 

the results of which will have a direct bearing on how the latter phases proceed. In ideal 

circumstances, these studies should be carried out prior to negotiating the contract, but if 

this is not possible, then the contract must contain the assumption that agreement on 

these issues will be able to be reached. 

In spite of this assumption, it is essential that such a contract makes provisions for the 

possibility that agreement will not be reached. In this eventuality the contract will need to 

be terminated at the end of the transition or soon after and there will need to be an 

agreed mechanism for the division of the costs incurred. 

1 The contract structure 

The agreement will normally contain the following information. 

1 

2 

The names and addresses of both parties, the dates on which the contract will 

start and finish and a precise description of those areas of the client’s 

organization to which the outsourcing agreement relates. 

Guidelines and, where applicable, rules for the management of the 

transferred service, along with a description of the responsibilities of each of 

the key managers. In addition, management disagreements between the 

parties should be anticipated and a framework should be set down for 

dealing with such situations.

176 

The service to which the outsourcing contract relates and 

the charge that will be made for that service must, obviously, 

be set down in clear and unambiguous detail together with the commencement 

date and, if it is different, the date from which charges will commence. Invoicing procedures 

and settlement terms should be clearly set down, along with any agreement 

allowing increases in charges during the contract period, with a detailed explanation of 

the inflation index or other basis upon which such increases are made. It is often necesthe 


3 

4 

5 

6 

7 

8 

9 

A detailed description, with full technical explanations, of all services affected 

by the agreement, both those being transferred and those retained. 

A detailed explanation of any specially negotiated exit clauses along with any 

mid-contract termination periods agreed in advance. 

Details of any arrangement for the client to benchmark the service and the 

date when it is to be carried out. 

The date by which renewal discussions must have commenced before the end 

of the contract period. 

Details of any agreement to share the risks and/or rewards. 

An anticipation of outside factors, such as changes in legislation, that might 

affect the contract and a framework for dealing with any problems that might 

arise as a result. 

An explanation of any indemnity enjoyed by both the provider and the client. 

2 Key issues 

Special attention should be paid to the following issues. 

all parties to the 

agreement and all 

their staff and agents 

are normally required 

to respect the 

confidentiality of the 

key elements of the 

contract 

Confidentiality 

All parties to the agreement and all their staff and agents 

are normally required to respect the confidentiality of the 

key elements of the contract. This requirement can continue 

for a number of years beyond the duration of the 

original contract. 

Payment terms


sary to estimate payment in the early stages when the amount of work to be performed is, 

as yet, uncertain. This situation is normally dealt with by the inclusion of a clause detailing 

how and when any discrepancies should be corrected. 

It is likely that, no matter how carefully planned the agreement, during the course of 

the contract it will be appropriate for the service provider to perform additional services 

not originally allowed for. This situation should be anticipated with the inclusion in the 

contract of a formula by which payment for these services may be calculated. 

The provider will normally wish to insert a clause requesting that expenses should be 

paid within a specified period, on presentation of the relevant expense forms and receipts. 

Such expenses will mainly be those that the client’s staff previously incurred themselves in 

carrying out the transferred service, such as travelling and living expenses. 

Procedures 

The contract normally includes a clause requesting the provider to attempt, to the best of 

its abilities, to meet any unexpected increases in workload and changes in target dates 

that might arise. Such a clause would be very difficult to enforce but it is intended to 

demonstrate that the provider should react to changes in circumstances in the same way 

that the client’s staff would have done and with the client’s best interests at heart. 

Most outsourcing contracts will also contain an acknowledgement that changing circumstances 

over the lifetime of the agreement, often five years or so, will naturally affect 

the level and type of the service required. The flexibility necessary to adapt to such 

changes should be built into the contract from the outset. Normally both parties agree 

that there should be no increase in cost for changes that do not result in an increase in 

workload. The framework should be in place for agreement to be reached at a suitable 

level on any changes to the scope of the contract. If the situation changes to the extent 

that alterations are required to the SLAs or to payment terms laid down in the contract, 

then suitable amendments should be added to the contract at the earliest possible date. 

It may be appropriate, particularly where a partnership arrangement is in place, for a 

clause to be inserted giving the provider the right to charge for short-term development 

costs incurred during the contract period. Incurring such costs would require the client’s 

agreement, and would be justified by action taken to improve the service in some way. 

Intellectual property 

The issue of intellectual property is given a great deal of attention in many contracts. This is 

natural, since not only will both client and service provider soon be using each other’s existing 

intellectual property, but they will also wish to know whether they have joint ownership 

of any new developments. Contracts tend not to go into precise detail about the individual 

elements of such property, instead classifications such as ‘software’ are normally sufficient.

178 


generally speaking, 

the parties to the 

agreement do not 

pay each other 

for intellectual 

property rights 

Generally speaking, the parties to the agreement do not pay 

each other for intellectual property rights. However, where 

such rights belong to third parties, care must be taken to 

ensure that the terms of any existing agreements or licences 

are not breached. 

The right of inspection 

It is frequently necessary for the client to enter the site and 

inspect various elements of work at intervals during the 

period of the agreement and the right to do so should be set out in the contract. 

Reasonable access should not be refused, although the provider may request written 

notice in advance of a visit to the site by the client for any purpose, including internal 

audit. It is not unknown for providers to insert a clause into the contract allowing them 

to charge the client for extra and unnecessary work caused by excessive visits. 

There can be no change to the right of access of the external auditors, which remains 

as it was prior to the outsourcing agreement. 

Statutory and other obligations 

The contract will normally contain a clause obliging all interested parties, including subsidiaries 

and any subcontractors, to comply with all statutory regulations such as health 

and safety requirements, by-laws, national and such international laws as apply and any 

rules previously imposed by the client. Discussions on any unusual rules and regulations 

relating to the client’s business should be held at an early stage of negotiations. 

Transferred property 

In some outsourcing agreements, the work will be carried out at premises already owned 

by the service provider. The contract relating to such an arrangement will probably contain 

a clause requesting the provider to ensure that reasonable security measures are in 

place. Where the client owns the premises in which the work will be carried out, then it 

may wish to insert a clause in the contract stating that no changes should be made to the 

buildings and site without prior notice being given. If the agreement involves leasing or 

selling the site to the provider, the client should probably consider what the best course of 

action would be in the eventuality that the agreement has to be terminated, and make 

provision for this in the contract. 

The possibility of claims 

The contract will normally contain an agreement that notice will be given in writing as 

soon as possible of any intent on the part of either of the parties to make a claim against


the other. In addition, they will agree that in such an event, any relevant records 

requested by either party will be made available to the other as rapidly as possible. 

The contract will also need to deal with the possibility of a successful claim for negligence 

against one or both of the parties to the agreement by a third party. It is important 

that neither client nor provider should suffer a financial loss as a result of negligence on the 

part of the other. Thus, there will usually be a clause in the contract stating that where the 

fault lies only with one party, it will indemnify the other against any such claims. 

Limitation of liability 

It will usually be in the best interests of each of the parties to the contract that liability 

should be limited for both of them. They will normally agree that any problems should 

be addressed amicably, avoiding punitive damages where possible. The party at fault 

should have as much chance as possible to redress the situation and the other party 

should do its utmost to limit any resulting damage. 

Some contracts also include a clause specifying a time period within which any claim 

must be made. Such a time period will normally commence at the point when the problem 

has become apparent to both parties. 

Dealing with personnel 

The contract will normally state that, from a specified transition date, the provider will 

take over complete responsibility for the staff, including the need to conform to the 

TUPE regulations and Acquired Rights Directive. It will usually be made clear that 

responsibility for any actions taken before this date rests with the client. The provider will 

wish to ensure that any personnel liabilities which become known after the transfer date 

but which relate to the period before that date fall to the client, whether or not the client 

knew about them or should have known about them. 

It is important that any liabilities for redundancy settlements should be clearly understood. 

It will normally fall to the client to settle with any employees made redundant 

prior to the transition. If those redundancies took place 

after the parties began their negotiations, it will be advisable 

to explain in detail the action that was taken and 

ensure that there is no uncertainty about the liability. 

The transferred employees must be informed of their 

new terms and conditions in writing, with clear explanations 

of any changes. The contract should contain a 

statement to the effect that this has been carried out. If 

the client wishes to make any guarantees to the staff 

being transferred, relating either to their continuation of 

the transferred 

employees must be 

informed of their new 

terms and conditions 

in writing, with clear 

explanations of any 

changes

180 


employment or to their terms and conditions, then these will also need to be precisely 

documented. 

Dealing with pension rights 

The TUPE regulations do not go into detail on the issue of pension rights. For this 

reason, some people feel that the subject can be safely omitted from an outsourcing contract. 

In practice, however, this is an area which does need to be laid down in careful 

detail in the contract, due to the long-term nature of any problems which might arise 

from short-term errors. The fact that each member of staff may have a different pension 

arrangement means that, in order to cut down on the possible confusion in years to 

come, full details will need to be given of the actions taken and arrangements made for 

each transferred individual. 

The provider normally requires certain 

guarantees and assurances 

It will normally be in the provider’s interests to ensure that the following provisions are 

included in the contract. 

1 

2 

3 

4 

5 

An undertaking by the client to provide all the necessary documentation, 

specialized knowledge and anything else required by the provider in order to 

fulfil its obligations, without additional charge. 

The client’s guarantee that the information it has provided and on which the 

provider’s bid was based is accurate. This should cover issues such as the 

ownership and condition of all relevant assets, including intellectual property 

such as software licences, and also the financial records and payments relating 

to the transferred staff. 

An undertaking from the client that, for the period of the contract, it will 

allocate personnel and managers with the necessary skills to liaise with the 

provider and, where applicable, provide an acceptable working environment 

for the provider’s staff. 

An undertaking from the client to make good any breaches of the above 

clauses at its own expense. 

Following on from the last point, an agreement that if the provider’s 

performance is affected by serious breaches by the client of any of the above 

then the provider will have the right to renegotiate or, as a last resort, to cancel 

the contract.


3 Details of the transition 

This part of the contract will usually include the following information. 

1 

2 

3 

4 

The date and time at which the provider will take over the property, 

equipment, materials, other assets, software licences, intellectual property and 

the staff, and the terms under which this transfer will take place. 

In case of any unanticipated problems relating to the transfer of the above, a 

framework for deciding on alternative arrangements and for determining who 

should bear any resulting costs. Problems may arise where insufficient 

consideration has been given to ownership rights over, for example, software 

and equipment belonging to third parties. 

Details of the responsibilities and costs to be borne by the provider for the 

lifetime of the contract. 

Details of the responsibilities and costs to be borne by the client for the 

lifetime of the contract. 

Detailing the services to be provided during the transition period 

Each contract will be unique but most will include provisions to cover the aspects which 

follow. 

1 

2 

3 

4 

Agreements relating to the preparation of staff due to be transferred, including 

training and counselling, along with any similar assistance to be provided to 

the staff staying with the client. Arrangements for the transfer of staff records 

and payroll must also be detailed. A date, before the end of the transition 

period, will normally be given by which these tasks should be completed. 

Ideally, this date should be set as early as possible in order to ensure that any 

problems are ironed out before the transition phase is completed. 

A detailed description of the service to be performed, service level agreement 

(SLA) and reporting mechanisms. 

Details of agreed performance measures and the rates at which any penalties 

and/or rewards will be calculated. 

Details, including start and finish dates, of any special projects to be 

undertaken as an integral part of the transition period. Such projects might

182 


include, for example, the implementation of a new ERP system. The 

estimated costs of the project will probably be set between minimum and 

maximum levels and there may be specific penalties and rewards relating to 

the performance of the project. 

5 

6 

7 

Details and costs of consultancy required during the transitional period for 

work including, for example, re-engineering. It is normal to cost such 

consultancy separately from that required at other stages of the contract or for 

special projects. 

An undertaking on the part of the provider that if any of the agreed service is 

to be subcontracted, it will assume full responsibility for the subcontractors’ 

actions and guarantee the standard of performance. 

If the client wishes to retain the opportunity to veto the appointment of 

certain staff, then it will be necessary to insert a clause explaining what rights 

the client has relating to personnel issues. 

4 Termination of agreements 

the contract will 

normally set down 

those conditions 

which will need to 

prevail for the 

agreement to be 

terminated before 

the agreed end date 

The contract will normally set down those conditions 

which will need to prevail for the agreement to be terminated 

before the agreed end date. These may include: 

● 

● 

● 

● 

insolvency of either party; 

the refusal on the part of either party to abide by the 

terms previously agreed and set down in the contract; 

non-payment; 

the completion of a key project. For example, if the 

client’s decision to outsource was largely influenced 

by the prospect of the development of new 

technology, it may be that once this is in place, the completion of the remainder of 

the agreement appears less attractive. 

All of the above possibilities need to be considered in terms of the consequences for both 

parties. In the event that a termination of the contract becomes necessary, it will be in the 

best interests of both parties to ensure that the minimum of time and disruption is 

required in order to extricate them from the agreement. The amount of the final payment 

due will depend on what event triggered the termination of the contract. In the last of the


examples given above, the client terminates the contract having gained the benefit of the 

new technology that was its main reason for wanting to outsource. In this case, the 

provider is likely to seek an additional payment, on the grounds that, rather than the 

long-term agreement which it believed itself to be involved in, the work it did during the 

period amounted to little more than consultancy at a lower than normal rate of pay. 

The contract must also set down the procedures attendant upon the normal termination 

of the contract. The provider will usually agree to: 

● 

● 

● 

● 

● 

return the responsibility for the service to the client, or pass it to a third party, with 

no disruption to the performance of the service. 

allow the client the continued use, under a reasonably priced licence, of software and 

any other intellectual property necessary for the performance of the service; 

ensure that any confidential material belonging to the client, for which it no longer 

has a valid requirement, is returned or destroyed; 

evacuate the client’s premises, where appropriate, leaving them in a good condition, 

which should be defined here to avoid any dispute on termination of the contract. 

The agreement will also usually state that all materials, etc. essential for the 

continuation of the service will remain, whilst any of the provider’s equipment, 

personnel and materials not required for this purpose are to be removed. 

not recruit staff from the client for a period of time laid down in the agreement. 

The client agrees to: 

● 

● 

● 

● 

provide any reasonable assistance required by the provider in returning the service to 

the client or transferring to a third party; 

ensure that any confidential material belonging to the provider, for which it no 

longer has a valid requirement, is returned or destroyed. As with the similar 

undertaking on the part of the provider, it will normally be wise to define such 

materials clearly in the original contract; 

not recruit staff from the provider for a period of time laid down in the agreement. 

pay for the service until the end of the contract and, at that point, resume control of 

and responsibility for the service. 

Flexibility and the contract 

It is usually argued that clients setting too rigid a contract, e.g. ‘if you fail to reach any of the 

following targets the penalty will be X’ usually pay more for the services than if the contract 

had been more flexible. As explained in the main body of the book, this usually happens

184 


because a provider considering itself under financial pressure will take every opportunity to 

improve its profit margin on anything it is required to do that is out of scope. 

It is, therefore, essential that the client organization understands the importance of 

flexibility from the earliest possible moment. To start with 

it will be necessary to detail what is in scope and which of 

a plan that requires 

specified weekly or 

even daily deadlines 

will not please many 

providers 

the related areas are outside the scope. From both parties’ 

point of view, but particularly the client’s, it is important 

that there is no room for doubt in this matter. Only when 

this has been achieved can adequate pricing levels be 

agreed for both in scope and out of scope work. 

Sometimes the client organization will attempt to limit 

the chance of failure by producing very detailed plans for 

both the transition and contract life that stipulate targets 

that the providers must achieve. A detailed plan will be necessary and should be included 

in the contract so that there are clear targets for all concerned to aim for and to make it 

easier for managers to be able to identify reasons for delays. However, a plan that requires 

specified weekly or even daily deadlines will not please many providers. 

A typical compromise is to ‘attach’ the detailed plan to the contract and make the 

main targets and the relevant timescales, conditions of the contract. 

Clearly, over time, technology is going to change everything done in every business. It 

may be, therefore, that before the end of five-year contracts which started in 2000, there 

are significant changes in the accepted state of the art way of carrying out some of the 

work that is in scope in the contracts. If, in such circumstances, the service provider recommends 

that the new technology is utilized before the end of the contract, what is the 

legal and moral situation if an increased charging rate is also requested Presumably, if it 

could be shown that it was also in the provider’s interest to take up the new technology 

and if there was no material change to the end product, then a court of law might reason 

that there was no reason to change the charging basis. However, circumstances are rarely 

that simple and it might be a factor in the provider’s defence if it could demonstrate that 

it would be disadvantaged in some way by continuing with out-of-date technology. 

Obviously, whatever the legal and moral rights and wrongs it would be preferable to 

avoid confrontation between the parties. Common sense dictates that this will be best 

achieved if both parties understand the in and out of scope issue and have agreed some 

flexible basis for out of scope charging.

appendix d 

the rights of transferred staff 

TUPE requirements 187 

Difficulties which 

can arise 188 

Redundancy issues 189

the rights of transferred staff 187 

There is a significant amount of preparation work to be completed before the transfer 

date in regard to the harmonization of terms and conditions for transferring employees. 

The extent of this work will depend on the number of 

people to be transferred and the range of terms enjoyed by 

these employees. However, the client is likely to benefit 

from the fact that the successful service provider will 

almost certainly have experience of other transfers either 

from outsourcing arrangements or from assisting with 

company acquisitions and mergers. The provider will be at 

least as determined as the client that the transfer is effected 

as smoothly as possible, because on the transfer date any 

employee problems become the provider’s. 

It is important for a client to study the implications of 

the Transfer of Undertakings (Protection of Employment) 

Regulations 1981 (TUPE) as soon as outsourcing is seen as 

a serious option. 

The main aim of TUPE is to ensure that both parties to 

the transfer of employment treat the employees in a fair 

and reasonable way. The legislation tries to: 

● 

● 

● 

● 

● 

● 

prevent people being made redundant unnecessarily; 

provide adequate counselling and an explanation of what will happen after the transfer; 

maintain the terms and benefits of employment; 

help with essential relocation; 

provide ongoing training; and 

create a reasonable working environment. 

there is a significant 

amount of 

preparation work to 

be completed before 

the transfer date in 

regard to the 

harmonization of 

terms and conditions 

for transferring 

employees 

TUPE requirements 

One effect of the legislation, however, is that set ‘rules’ have to be taken into consideration. 

As far as outsourcing is concerned the following TUPE requirements should be noted.

188 


1 

2 

3 

4 

5 

The transferor or the transferee, for that matter, can make employees 

redundant before or after the business is transferred, but only on the grounds 

of economic, technical or organization reasons entailing changes in the 

workforce. These grounds are normally interpreted in such a way that the 

transfer itself should not be the principal reason for the redundancies. 

It follows, then, that to comply strictly with the regulations, the transferor 

cannot make staff redundant before the transfer simply because the transferee 

does not want them. However, the transferee will probably be able to do so 

after the transfer. 

If staff are dismissed on the day of transfer, the transferee is responsible for any 

redundancy payments due. 

On the transfer, the transferee assumes the responsibilities of the transferor – 

the principle is that the employee should not be in a less advantageous 

position than before the transfer. Accordingly, all conditions of employment 

remain the same, including anything that was previously agreed with a 

recognized trade union. The transferee can only change these terms with the 

full and written agreement of the employees affected. 

The transferor is legally obliged to inform any employees likely to be affected 

that a transfer of undertakings is contemplated and this should be done at 

least six weeks before the transfer date. 

Difficulties which can arise 

On an industry by industry basis, the major service providers probably offer terms of 

employment that are as advantageous as any group of employers in Europe. Nevertheless, 

it is important to realize that their basic terms and conditions for transferred staff may 

differ slightly from what some other employees enjoy. For example, in many of the service 

provider organizations, there will be individuals, usually called consultants, whose lifestyle 

will be based on frequent travel to various client sites to act as the main instigators of 

change. These consultants will probably enjoy a better package than the average employee 

who has joined as a result of an outsourcing transfer and will mainly be confined to his or 

her original site. Almost all organizations in both the public and private sectors employ 

varied grading levels to reward employees with the highest skill levels. Not being included 

in higher grades has been known to cause unrest amongst some transferring employees. 

For that reason the service providers should explain their terms and conditions well in 

advance of the transfer date.


The key factor as far as the TUPE regulations are concerned is that the employees’ situation 

is likely to be no worse after transferring to the service provider. However, in 

almost all providers, the transferred employees can and do progress through the company 

according to their abilities. EDS and others can demonstrate that many of their senior 

people originally joined as a result of an outsourcing transfer. 

Difficulties can arise where an employee or groups of employees are rewarded by the 

transferring employer at significantly higher rates than the provider can justify taking into 

account seniority, ability or qualification. In these circumstances the two parties must 

attempt to find a compromise with the employees concerned. 

The TUPE and other regulations governing the transfer 

of staff do not appear to represent an insurmountable barrier 

to organizations intent on outsourcing. However, they 

should not be taken lightly, as their interpretation is subject 

to challenge and change. Since 1997, for example, there 

have been a number of widely differing interpretations 

across European courts with the result that some legal 

experts now doubt that TUPE applies to outsourcing. 

Obviously, responsible legislators wish to continue to protect 

transferred staff and accordingly another update to the 

TUPE regulations has been promised. 

Redundancy issues 

the TUPE and other 

regulations governing 

the transfer of staff 

do not appear to 

represent an 

insurmountable 

barrier to 

organizations intent 

on outsourcing 

There is nothing to prevent the parties to the contract making any arrangements they like 

regarding which of them pays for the possible redundancies at each stage. However, it is 

normal for the client to indemnify the service provider for redundancy costs and any TUPE 

implications arising from the actions necessary to complete the transition, including relocation 

costs, due as a result of the transfer of services and from any related implementation of 

new systems. These indemnities will normally cover staffing implications at any of the 

client’s other companies, sites and business functions that might be affected. 

The provider’s responsibility for any further redundancies normally begins after the 

transition stage has been completed. Where a shared risk/rewards benefit contract has 

been agreed, the contract may either allow for the provider to be liable for further redundancy 

costs or these may be treated as a first charge on the arrangements made. 

If at the end of the contract period a new contract is not awarded to the existing 

provider, then a further transfer of undertakings will be necessary, either to another services 

provider or back to the client. The TUPE regulations will again apply and any 

further redundancies will most likely be the responsibility of the transferee. A copy of the 

TUPE regulations booklet follows:


The TUPE regulations 

The Department of Trade and Industry produces a booklet PL 699 (REVISION 4 at the 

time of writing but REVISION 5 due) which goes into some detail to explain the employment 

rights on the Transfer of Undertakings (Protection of Employment) Regulations 

1981 (S1 1981 No 1794). These have been amended several times, most recently by 

the Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 

1995 (SI 1995 No 2587) and the Trade Union Reform and Employment Rights Act 

1993 (TURERA). Further, as yet unpublished, amendments were made to the Transfer of 

Undertakings (Protection of Employment) (Amendment) Regulations in 1999 and the 

government intends to have another go at it in 2000. 

These Regulations, which are usually termed TUPE for short, implement the 

European Community Acquired Rights Directive (77/187/EEC), amended by Directive 

98/50/EC. The European Union Acquired Rights Directive protects employees from the 

loss of ‘acquired rights’ to pensions, seniority and other valuable privileges when they 

are transferred to another employer. 

Rights already conferred by existing employment legislation are not affected by 

the TUPE Regulations. 

The DTI’s PL 699 (Rev 4) contains the following Outline of Regulations. 

Purpose 

The Regulations preserve employees’ terms and conditions when a business or 

undertaking, or part of one, is transferred to a new employer. Any provision of any, 

agreement (whether a contract of employment or not) is void so far as it would 

exclude or limits the rights granted under the Regulations. 

The Regulations have the effect that: 

● Employees employed by the previous employer when the undertaking changes 

hands automatically become employees of the new employer on the same terms 

and conditions. It is as if their contracts of employment had originally been made 

with the new employer. Thus employees’ continuity of employment is preserved, 

as are their terms and conditions of employment under their contracts of 

employment (except for certain occupational pension rights). 

● Representatives of employees affected have a right to be informed about the 

transfer. They must also be consulted about any measures which old or new 

employer envisages taking concerning affected employees. 

Transfers covered by Regulations 

The Regulations apply when an undertaking or part of an undertaking is transferred 

from one employer to another. 

Some examples of transfers are: 

● where all or part of a sole trader’s business or partnership is sold or otherwise 

transferred;


● where a company, or part of it, is bought or acquired by another, provided this is 

done by the second company buying or acquiring the assets and then running 

the business and not acquiring the shares only; 

● where two companies cease to exist and combine to form a third; 

● where a contract to provide goods or services is transferred in circumstances 

which amount to the transfer of a business or undertaking to a new employer. 

The Regulations can apply regardless of the size of the transferred undertaking. 

Thus the Regulations equally apply to the transfer of a large business with many 

thousand employees or of a very small one (such as a shop, pub or garage). 

The Regulations apply equally to public or private sector undertakings. 

Transfers not covered by the Regulations 

The Regulations do not apply to the following: 

● transfers by share take-over because, when a company’s shares are sold to new 

shareholders, there is no transfer of the business – the same company continues 

to be the employer; 

● transfers of assets only (for example, the sale of equipment alone would not be 

covered, but the sale of a going concern including equipment would be covered); 

● transfers of a contract to provide goods or services where this does not involve 

the transfer of a business or part of a business; 

● transfers of undertakings situated outside the United Kingdom. 

Those provisions of the Regulations which relate to dismissal of employees because 

of the transfer, the duty to inform and consult representatives and the failure to 

inform and consult them as required, do not apply to employees who, under their 

contracts of employment, normally work outside the United Kingdom. 

Employer’s position in a transfer 

Under the Regulations, when an undertaking is transferred the position of the previous 

employer and the new employer is as follows: 

● The new employer takes over the contracts of employment of all employees who 

were employed in the undertaking immediately before the transfer, or who would 

have been so employed if they had not been unfairly dismissed for a reason connected 

with the transfer. 1 An employer cannot just pick and choose which 

employees to take on (but see below). 

The new employer takes over all rights and obligations arising from those contracts 

of employment, except criminal liabilities and rights and obligations relating to 

1 The effect of the Regulations as interpreted by the House of Lords in Litster and Others v Forth Dry Dock and 

Engineering Company Limited and another. This judgment implied these words into the Regulations.


provisions about benefits for old age, invalidity or survivors in employees’ occupational 

pension schemes. 

● The new employer takes over any collective agreements made on behalf of the 

employees and in force immediately before the transfer (see also Trade union 

recognition). 

● Neither the new employer nor the previous one may fairly dismiss an employee 

because of the transfer or a reason connected with it, unless the reason for the 

dismissal is an economic, technical or organizational reason entailing changes in 

the workforce. If there is no such reason, the dismissal will be unfair. If there is 

such a reason, and it is the cause or main cause of the dismissal, the dismissal 

will be fair provided an employment tribunal decides that the employer acted 

reasonably in the circumstances in treating that reason as sufficient to justify 

dismissal. If, in this case, there is a redundancy situation, the usual redundancy 

procedures will apply (see Redundancy). 

● The new employer may not, unless the contract of employment so provides, unilaterally 

worsen the terms and conditions of employment of any transferred employee. 

● The previous and new employers must inform and consult representatives of the 

employees (see Information and consultation). 

Employees’ position in a transfer 

When an undertaking is transferred the position of the employees of the previous or 

new employers is as follows. 

● An employee claiming to have been unfairly dismissed because of a transfer has 

the right to complain to an employment tribunal. 

● Transferred employees who find that there has been a fundamental change for 

the worse in their terms and conditions of employment as a result of the transfer 

generally have the right to terminate their contract and claim unfair dismissal 

before an employment tribunal, on the grounds that actions of the employer 

have forced them to resign. Employees may not make this type of claim solely 

on the grounds that the identity of their employer has changed unless the circumstances 

of an individual case change and that change is significant and to 

the employee’s detriment. 

In both the above cases dismissal because of a relevant transfer will be unfair 

unless an employment tribunal decides that an economic, technical or organizational 

reason entailing changes in the workforce was the main cause of the 

dismissal and that the employer acted reasonably in the circumstances in treating 

that reason as sufficient to justify dismissal. Even if the dismissal is considered fair, 

employees may still be entitled to a redundancy payment (see Redundancy). 

For details of how to complain to an employment tribunal (see Complaining to 

an employment tribunal).


● Employees employed in the undertaking immediately before the transfer (or 

who would have been so employed had they not been unfairly dismissed for 

a reason connected with the transfer – see footnote on page 191) automatically 

become employees of the new employer, unless they inform either the 

new or the previous employer that they object to being transferred. In this 

case the contract of employment with the previous employer is terminated by 

the transfer of undertaking but the employee is not dismissed. The previous 

employer may re-engage the employee. 

An employee’s period of continuous employment is not broken by a transfer, 

and, for the purposes of calculating entitlement to statutory employment rights, 

the date on which the period of continuous employment started is the date on 

which the employee started work with the old employer. This should be stated in 

the employee’s written statement of terms and conditions; if it is not, or if there 

is a dispute over the date on which the period of continuous employment 

started, the matter can be referred to an employment tribunal. (For further 

details, see booklet PL 700 Written statement of employment particulars available 

free from Jobcentres.) 

● Transferred employees retain all the rights and obligations existing under their 

contracts of employment with the previous employer and these are transferred to 

the new employer, with the exception that the previous employer’s rights and 

obligations relating to benefits for old age, invalidity or survivors under any 

employees’ occupational pension schemes are not transferred. If the new 

employer does not provide comparable overall terms and conditions, including 

pension arrangements, an employee may have a claim for unfair dismissal. 

Occupational pension rights earned up to the time of the transfer are protected by 

social security legislation and pension trust arrangements. 

Redundancy 

Dismissed employees may be entitled to redundancy payments. Employers must 

also ensure that the required period for consultation with employees’ representatives 

is allowed. More details are in booklets PL 833 Redundancy consultation and 

notification and PL 808 Redundancy payments, both available free from Jobcentres. 

Entitlement to redundancy payments will not be affected by the failure of any 

claim which an employee may make for unfair dismissal compensation. 

Where there are redundancies and it is unclear whether the Regulations apply, it 

will also be unclear whether the previous or the new employer is responsible for 

making redundancy payments. In such cases employees should consider whether to 

make any claims against both employers.


Trade union recognition 

If the transferred undertaking maintains an identity distinct from the remainder of 

the new employers business, the new employer will be considered to recognize an 

independent trade union, in respect of employees transferred, to the same extent 

that it was recognized by the previous employer. If the undertaking does not keep its 

separate identity, the previous trade union recognition lapses, and it will then be up 

to the union and the employer to renegotiate recognition. 

Information and consultation 

Who must be consulted 

These requirements apply in respect of any employees who may be affected by the 

transfer, whether employed by the new or previous employers. An employer is 

required to inform and, if appropriate, consult either representatives of an appropriate 

recognized trade union or elected representatives of the employees. 

An employer who recognizes an independent trade union for collective bargaining 

purposes is not bound to inform/consult it for this purpose, but if this is not done 

the employer must inform/consult elected representatives. However, an employer 

who does not recognize an independent trade union for a particular category of 

employees who may be affected, may only inform/consult elected representatives. 

An employer may inform/consult a recognized trade union for one group of employees 

and elected representatives for another. 

Where the employer chooses to inform/consult an independent recognized 

trade union, the employer must deal with a representative of that union who is 

authorized by the union to carry on collective bargaining with that employer; that 

maybe the shop steward, or the district union official, or, if appropriate, a national or 

regional official. 

Where the employer chooses to inform/consult elected representatives, 

who must be employees of the company, he must take steps to ensure that representatives 

are elected in good time for information/consultation to be undertaken. 

There is no statutory requirement for permanent representation; it will be sufficient 

for an employer to arrange for elections as and when required. 

Representatives need not be elected specifically for this purpose; an employer 

may inform/consult through an existing consultative body whose membership is 

elected, for example, a staff council, provided that it is appropriate to inform/consult 

this body on this issue. It would not, for example, be appropriate to inform/consult a 

committee specifically established to consider the operation of a staff canteen 

about a transfer affecting, say, sales staff; but it may well be appropriate to 

inform/consult a committee which is regularly informed or consulted more generally 

about the company’s financial position and personnel matters. 

The legislation does not specify how many representatives must be elected or 

the process by which they are to be chosen. An employment tribunal may wish to 

consider, in determining a claim that the employer has not informed or consulted in


accordance with the requirements, whether the arrangements were such that the 

purpose of the legislation could not be met. An employer will therefore need to consider 

such matters as whether: 

● the arrangements adequately cover all the categories of employees who may be 

affected by the transfer and provide a reasonable balance between the interests 

of the different groups; 

● the employees have sufficient time to nominate and consider candidates; 

● the employees (Including any who are absent from work for any reason) can 

freely choose who to vote for; 

● there is any normal company custom and practice for similar elections and, if so, 

whether there are good reasons for departing from it. 

What must an employer do 

First, the employer of any employee who may be affected must tell their representatives: 

● that the transfer is going to take place, approximately when, and why; 

● the legal, economic and social implications of the transfer for the affected employees; 

● whether the employer envisages taking any action (reorganization for example) in 

connection with the transfer which will affect the employees, and if so, what 

action is envisaged; 

● where the previous employer is required to give the information, he or she must 

disclose whether the prospective new employer envisages carrying out any action 

which will affect the employees, and if so, what. The new employer must give the 

previous employer the necessary information so that the previous employer is 

able to meet this requirement. The information must be provided long enough 

before the transfer to give adequate time for consultation. 

Second, if action is envisaged which will affect the employees, the employer must 

consult the representatives of the employees affected about that action. The consultation 

must be undertaken with a view to seeking agreement. During these 

consultations the employer must consider and respond to any representations 

made by the representatives. If the employer rejects these representations he/she 

must state the reasons. 

If there are special circumstances which make it not reasonably practicable for 

an employer to fulfil any of the information or consultation requirements, he/she 

must take such steps to meet the requirements as are reasonably practicable. 

Rights of representatives 

Representatives and candidates for election have certain rights and protections to 

enable them to carry out their function properly. The rights and protections of trade


union members, including officials, are in some cases contained in separate provisions 

to those of elected representatives but are essentially the same as those of 

elected representatives described below. For further details of the rights of trade union 

members see booklet PL 871 Union membership and non-membership rights. 

The employer must allow access to the affected workforce and to such accommodation 

and facilities, e.g. use of a telephone, as is appropriate. What is 

‘appropriate’ will vary according to circumstances. 

The dismissal of an elected representative will be automatically unfair if the 

reason, or the main reason, related to the employee’s status or activities as a representative. 

An elected representative also has the right not to suffer any detriment 

short of dismissal on the grounds of their status or activities. Candidates for election 

enjoy the same protection. Where an employment tribunal finds that a 

dismissal was unfair, it may order the employer to reinstate or re-engage the 

employee or make an appropriate award of compensation (see also booklet PL 712 

Unfairly dismissed). Where an employment tribunal finds that a representative or a 

candidate for election has suffered detriment short of dismissal it may order that 

compensation be paid. 

An elected representative also has a right to reasonable time off with pay during 

normal working hours to carry out representative duties. Representatives should be paid 

the appropriate hourly rate for the period of absence from work. This is arrived at by 

dividing the amount of a week’s pay by the number of normal working hours in the 

week. The method of calculation is similar to that used for computing redundancy payments 

(see booklet PL 808 Redundancy payments available free from DTI orderline 

0870 1502 500). 

Complaining to an employment tribunal 

The following may complain to an employment tribunal: 

● an employee who has been dismissed or who has resigned in circumstances in which 

they consider they were entitled to resign because of the consequences of the transfer 

(see Employees’ position in a transfer). An employee must complain within 

three months of the date when their employment ended. (The method of calculating 

this date is explained in booklet PL 712 Unfairly dismissed available free from 

Jobcentres). It may be unclear whether claims should be made against the previous 

or the new employer. In such cases, employees should consider whether to claim 

against both employers. Certain categories of employees are not entitled to claim 

unfair dismissal; a list of these is given in booklet PL 712 Unfairly dismissed 

● an elected or trade union representative, if the employer does not comply with the 

information or consultation requirements (see Information and consultation). A 

representative must complain within three months of the date of the transfer; 

● a representative or candidate for election who has been dismissed, or suffered 

detriment short of dismissal. A complaint must be made within three months of


the effective date of termination (or, in the case of a detriment short of dismissal, 

within three months of the action complained of); 

● a representative who has been unreasonably refused time off by an employer, or 

whose employer has refused to make the appropriate payment for time off, may 

also complain to an employment tribunal. A complaint must be made within 

three months of the date on which it is alleged time off should have been 

allowed or was taken; 

● an affected employee where the employer has not complied with the information 

or consultation requirements other than in relation to a recognized trade union or 

an elected representative. A complaint must be made within three months of the 

date of the transfer. 

(In any one of the above cases the tribunal can extend the time limit if it considers 

that it was not reasonably practicable for the complaint to be made within 

three months.) 

● an employee who wishes to claim a redundancy payment. The application should 

normally be made within six months of the dismissal (see booklet PL 808 

Redundancy payments). 

The necessary form IT 1, or IT 1 (Scot) in Scotland, for application to a tribunal and 

explanatory leaflet ITLI can be obtained from local offices of the Employment 

Service. 

If a representative complains to an employment tribunal that an employer has 

not given information about action proposed by a prospective new employer and if 

the employer wishes to show that it was ‘not reasonably practicable’ to give that 

information because the new employer failed to hand over the necessary information 

at the right time, the employer must tell the new employer that he or she 

intends to give that reason for non-compliance. The effect of this will be to make 

the new employer a party to the tribunal proceedings. 

Conciliation 

The tribunal will send a copy of the completed form to a conciliation officer of the 

Advisory, Conciliation and Arbitration Service (ACAS) who will try to promote a settlement 

of the complaint without a tribunal hearing. 

The services of a conciliation officer will also be available in the absence of a 

formal complaint, if the employee or either employer requests them. In such a 

case the employee or employer can get in touch with a conciliation officer 

through an office of ACAS (addresses on p. 12 of the PL 699 (Rev 4) booklet). 

Information given to conciliation officers in the course of their duties will be 

treated as confidential. It may not be divulged to the tribunal without the consent 

of the person who gave it.


Tribunal hearing and awards 

If no settlement is reached, the employment tribunal will hear the case. If complaints 

are upheld, awards may be made against the previous or new employer, 

depending on the circumstances of the transfer. 

Unfair dismissal awards – Employment tribunals may order reinstatement or 

re-engagement of the dismissed employee if the complaint is upheld, and/or 

make an award of compensation. Further details are in booklet PL 712 Unfairly 

dismissed 

Detriment awards – The employer may be ordered to pay compensation to the 

person(s) concerned. The compensation will be whatever amount the tribunal 

considers just and equitable in all the circumstances having regard for any loss 

incurred by the employee. 

Information and consultation awards – The employer who is at fault may be 

ordered to pay compensation to each affected employee, up to a maximum of four 

weeks’ pay. If employees are not paid the compensation, they may present individual 

complaints to the tribunal, which may order payment of the amount due to 

them. These complaints must be presented within three months from the date of 

the original award (although the tribunal may extend the time-limit if it considers 

that it was not reasonably practicable for the complaint to be presented within 

three months). 

Advisory, conciliation and arbitration service 

ACAS Public Enquiry Points 

Birmingham (0121) 622 5050 Liverpool (0151) 427 8881 

Bristol (0117) 974 4066 London (020) 7396 5100 

Cardiff (029) 2076 1126 Manchester (0161) 228 3222 

Fleet (01252) 811868 Newcastle upon Tyne (0191) 261 2191 

Glasgow (0141) 204 2677 Nottingham (0115) 969 3355 

Leeds (0113) 243 1371 

ACAS main offices 

Midlands Region 

Leonard House, 319/323 Bradford Street, Birmingham B5 6ET 

Anderson House, Clinton Avenue, Nottingham NG5 1AW


Northern Region 

Commerce House, St Alban’s Place, Leeds LS2 8HH 

Westgate House, Westgate Road, Newcastle upon Tyne NE1 1TJ 

North West Region 

Boulton House, 17–21 ChorIton Street, Manchester M1 3HY 

Cressington House, 249 St Mary’s Road, Garston, Liverpool L19 ONF 

South and West Region 

Regent House, 27a Regent Street, Clifton, Bristol BS8 4HR 

Westminster House, Fleet Road, Fleet, Hants GU13 8PD 

London, Eastern and Southern Areas 

Clifton House, 83–117 Euston Road, London NW1 2RB 

39 King Street, Thetford, Norfolk IP24 1AU 

Suites 3–5, Business Centre, 1–7 Commercial Road, Paddock Wood, Kent TN12 6EN 

Scotland 

Franborough House, 123–157 Bothwell Street, Glasgow G2 7JR 

Wales 

3 Purbeck House, Lambourne Crescent, Llanishen, Cardiff CF4 5GJ 

Head Office 

Brandon House, 180 Borough High Street, London SE1 1LW

index 

Abbey National Treasury Services 50 

Accenture 44, 46, 60, 62, 63 

accounts, outsourcing 125–7 

Acquired Rights Directive 179 

advertising, outsourcing 55 

agreements 

partnership 33, 59–60, 72–3, 83–4, 

119–20 

SLAs 72, 163–4 

see also contracts 

AIL Technologies Inc 63 

aims, identification of 79–80 

Andersen Consulting 44, 46, 60, 62, 63 

application service provider (ASP) 

outsourcing 63–6, 118–19 

Asia, Nike manufacturing plants 103 

ASP see application service provider 

AT&T 65 

Avanade 63 

banking industry 

outsourcing 50–1 

and supermarkets 53 

bankruptcy, effect on outsourcing 

agreements 108 

BCM see Boots Contract Manufacturing 

benchmarking 6–7, 21, 115 

and BPO 42 

Benchnet 7 

Boots Contract Manufacturing (BCM) 52 

BP 43 

BP Exploration 21–2, 94–5 

BPO see business process outsourcing 

BPR see business process re-engineering 

building project planning see facilities 

management 

buildings maintenance see facilities 

management 

business process outsourcing (BPO) 

banking industry 50 

reasons for 41–9 

savings 42, 44 

business process re-engineering (BPR) 

12–13, 20 

business satellites 

commentary 139–42 

concept 127–9 

principles 129–30 

theoretical examples 130–9 

call centres 

design 38 

outsourcing, reasons for 46–7 

Cap Gemini 107 

cash-flow, as driver for outsourcing 101 

Centaur Application Software Services 55 

centralizing/decentralizing 18 

Champy, James 12 

change 

impact on business 3–6 

need for constant 20, 21 

and risk 103 

change projects 

inhouse 11–21, 102, 116–19 

outsourcing as option 21–3, 119–22 

scale 19–20, 21 

changing circumstances 108–9, 177, 

183–4 

Child Support Agency (CSA) 74 

Churchill Insurance 50

202 index 

claims 178–9 

co-sourcing 28 

Commonwealth Bank 29 

commuting 132, 141 


benchmarking as measuring tool 6–7 

importance of 4–6, 115–16, 122 

inhouse solutions to maintaining 

11–21, 116–19 

outsourcing as aid 21–3, 119–21 

computer manufacturers 

contract manufacturing 52 

help desks 47 

Computer Sciences Corporation (CSC) 63 

confidentiality 153, 176, 183 

Connect 2020 62–3 

Conoco 43 

consultants and outsourcing 

as advisers 83, 148 

costing work 182 

pre-contract consultancy 96 

as providers 44–5, 46, 49, 75 

see also management consultants 

contact centres 47 

contract manufacturing 30, 52 

contracts 


183–4 

duration 80, 155 

exit strategies 107 

managing 167–9, 171–2 

multiple providers 95 

partnership agreements 33, 59–60, 

72–3, 83–4, 119–20 

structure and content 175–82 

termination 182–3 

see also service level agreements 

cost cutting 

and competitiveness 11–12 

need for constant 20 

implications for provider choice 80 

outsourcing and 21–2 

sole sourcing vs competitive tendering 

93 

see also savings from outsourcing 

costs of outsourcing 


183–4 

providers’ costs of competing 177 

at termination 182–3 

transition period 182 

see also savings from outsourcing 

CRM see Customer Relationship 

Management 

CSA see Child Support Agency 

CSC see Computer Sciences Corporation 

Customer Relationship Management 

(CRM) 15 

data warehousing 14, 38 

Dataquest 41 

Deutsche Bank 50 

Donovan Data Systems 55 

Driver & Vehicle Licensing Agency 74 

DSS see Social Security, Department of 

duration of contract 80, 155 

East Midlands Electricity 63 

Eastgate Group 70 

Eastman Kodak 22 

EDS 

clients, size of 72 

and co-sourcing 28 

deals 29, 33, 73–4 

and ERP 64 

origin 71 

staff career paths 189 

electronics industry and contract 

manufacturing 52 

Elizabeth Arden 61

index 203 

employees see staff 

enterprise resource planning (ERP) systems 

14, 38, 117, 118, 128, 186 

and ASP outsourcing 63–6 

environment, and business satellites 132, 

141 

equity stakes 

in providers 29, 121, 132 

for staff 130, 133, 134, 136, 139, 142 

Ernst & Young 61–2, 107 

ERP systems see enterprise resource 

planning systems 

estate management see facilities 

management 

exit strategies 107 

expenses 177 

facilities 

access to 178 

acquiring new 169–70 

location 110, 140 

security of 178 

facilities management (FM) 27, 30, 49–50 

failures, reasons for 73–6, 120 

financial systems 

cost of inhouse 37 

software solutions 13–15, 16–17 

financial systems: outsourcing 21–3 

accounts 125–7 

reasons for 41–6, 102 

savings 31, 44, 61 

timescale 84 

FM see facilities management 

Food Brokers Ltd 56 

Germany, postwar reconstruction 19 

globalization and competitiveness 11 

Goldman Sachs 50 

government 

public sector and business satellites 

130–9 

role of 11 

government departments, and outsourcing 

70 

BPO, use of 42 

and EDS 70 

facilities management, use of 50 

Private Financing Initiatives 45–6 

Hammer, Mike 12 

Hampden Plc 70 

health and safety 178 

Heywood, J. Brian 125, 148 

hierarchical structures 4–5 

housing associations, and telephone calls 47 

human resources (HR) 

outsourcing, reasons for 47–9 

outsourcing announcements, 

involvement in 86, 86–7 

IBM 65 

ICAEW see Institute of Chartered 

Accountants 

Indonesia, Nike manufacturing plants 103 

industrial revolution 140, 141 

industry, trade union disputes 19 

information loss and outsourcing 111 

Inland Revenue 74 

insourcing 53–4 

inspection, right of 178 

Institute of Chartered Accountants 

(ICAEW) 125, 126 

insurance industry 

outsourcing 50, 70 

SAGA and 53 

intellectual property 177–8, 183 

internet 

development skills shortages 38 

impact on technology-driven change 

63–4 

and joint ventures 63

204 index 

thin client solutions 65–6 

use in choosing providers 81 

internet publishing 

outsourcing, theoretical example 

136–8 

internet service providers (ISPs) 

and ASP outsourcing 66 

help desks 47 

invitations to tender (ITTs) 147 

ISPs see internet service providers 

IT 

cost of inhouse systems 37 

facilities management 49 

skills shortages 37, 38, 141–2 

staff, attracting 141–2 

see also software; technological 

developments 

IT: outsourcing 21–3 

development of trend 30–1 

HR systems 48 

loss of know-how 111 

multiple providers 94–6 

reasons for 37–41, 101 

savings 38, 95 

theoretical example 130–6 

timescale 84 

IT Group, Inc see The IT Group, Inc 

ITTs see invitations to tender 

John C Stennis Space Center 63 

joint ventures 28–9, 61–2, 62–3, 120 

theoretical examples 130–9 

knowledge loss and outsourcing 39, 110–11 

landscape management see facilities 

management 

Lasmo 43 

liability, limitation of 179 

Lloyds of London 70 

local authorities and business satellites 

130–40 

location, of outsourced services 110, 140 

LOR Management Services 63 

maintenance see facilities management 

management consultants 

and centralizing/decentralizing 18 

changing role of 5, 6 

using 15–17, 128 

management techniques, for performance 

improvement 12–13, 128 

managers 

and change 18 

changing role of 5–6 

measuring performance of 115 

outsourcing, effect of 110 

manufacturing systems, software solutions 

13–15, 16–17 

market research, outsourcing 55 

marketing, outsourcing 55–6 

Mars 61 

mergers and acquisitions, effect on 

outsourcing agreements 107–8, 156 

Microsoft Corporation 63, 65, 66 

Mississippi Space Services (MSS) 63 

Mitie 50 

MSS see Mississippi Space Services 

NASA 63 

National Health Service (NHS) 74 

National Starch & Chemical 43 

negligence 178–9 

NFC 43 

NHS see National Health Service 

Nike 103 

organizational structures 4–6 

virtual 29–30, 129

index 205 

outsourcing 

aims, identification of 79–80 

ASP outsourcing 63–6, 118–19 


183–4 

choosing service provider 32–3, 67–98, 

157–8 

continuous improvements 167 

contract manufacturing 30, 52 

creating own providers 125–42 

definition 27 

development of 21–3, 29–32 

failures, reasons for 73–6, 120 

from inside the industry 50–1 

insourcing 53–4 

inspection, right of 178 

joint ventures 28–9, 61–2, 62–3, 120, 

130–9 

liability, limiting 179 

marketing 55–6 

multiple providers, using 94–6 

overview 119–22 

performance measures 165–6 

pre-contract work 96 

pre-planning 161–72 

premises and location for outsourced 

work 110, 140, 169–70 

reasons for 35–56, 79, 99–103 

risks and concerns 103, 107–12 

savings 31–2, 38, 42, 44, 55, 61, 95 

shared service centres 60–2, 120 

software maintenance support 54–5 


88–93, 119 

timescale 84 

transition period 84–8, 109, 155 

types of 27–9 

see also contracts; requests for proposal; 

service level agreements; staff: 

outsourcing 

Outsourcing the Finance Function 

(Heywood) 148 

Oxford Asymmetry International 52 

PA Consulting 14 

partnership agreements 33, 59–60, 72–3, 

83–4, 119–20 

payment 

final 182–3 

terms 196–7 

payroll outsourcing 41 

pension rights 180 

performance improvement projects see 

change projects 

performance measurement 

managers 115 

service providers 165–6, 184 

see also benchmarking 

Perot Systems 29, 63 

personnel see human resources; staff 

PFIs see Private Financing Initiatives 

pharmaceutical products, contract 

manufacturing 52 

Powergen 63 

pre-contract work 96 

premises see facilities 

PricewaterhouseCoopers 41, 44, 46, 107 

Private Financing Initiatives (PFIs) 45–6 

property, facilities management 27, 30, 

49–50 

providers see service providers 

quality 165 

see also total quality management 

redundancies 

and HR 48 

client’s and provider’s responsibilities 

179, 188, 189, 193 

references, for service providers 81–2

206 index 

relocation 

as driver for outsourcing 101 

management see facilities management 

requests for proposal (RFPs) 

advantages and pitfalls 145–6 

content of 148–50, 152–6 

dialogue with providers 150–1, 156–7 

evaluating 157–8 

number of contenders 146–7, 152 

vs sole sourcing 89, 90–1, 92 

risk assessment studies 109 

risk reduction, as driver for outsourcing 

103 

risk/reward agreements 33, 59–60, 72–3, 

83–4, 119–20 

risks and concerns 

clients 103, 107–11 

providers 112 

Rolls Royce Aero-Engines 33 

Safeway 46 

SAGA 53 

Sainsbury 53 

sales, outsourcing 55–6 

savings from outsourcing 31–2 

BPO 42 

financial systems 44, 61 

IT 38, 95 

sharing with provider 33, 59–60, 

72–3, 83–4, 119–20 

software maintenance support 55 


91–2 

Sears 43 

security, of facilities 178 

service level agreements (SLAs) 72, 163–4 

performance measures 165–6, 184 


choosing 32–3, 67–98, 157–8 

and continuous improvements 166–7 

costs of competing for work 152 

creating own 125–42 

dialogue with 150–1, 156–7 

facilities, giving access to 178 

failures, reasons for 73–6 

guarantees and assurances, 

recommended 180 

joint ventures 28–9, 61–2, 62–3, 120, 

130–9 

mergers, acquisitions and bankruptcy 

107–8, 156 

multiple providers, using 94–6 

performance measures 165–6 

property responsibilities 178 

references for 81–2 

risks and concerns 112 

shared service centres 60–1, 120 

size 71–3 


88–93, 119 

staff responsibilities 154–5, 179–80, 

187–99 

statutory obligations 178, 179, 180, 

187–99 

sub-contractors 70–1, 182 

terms and conditions of employment 

180 

transition period, involvement in 

84–8, 109 

see also contracts; requests for proposal 

shared service centres (SSCs) 60–2, 120 

Shell Oil 43, 61–2 

single tender sourcing see sole sourcing 

skills 

loss and outsourcing 39, 111 

shortages in IT 37, 38, 141–2 

SLAs see service level agreements 

SMEs 

ASP outsourcing and 66 

outsourcing and 43, 44, 72–3

index 207 

Social Security, Department of 50, 74 

software 

ASP outsourcing 63–6, 118–19 

licences 177–8, 183 

maintenance support 54–5 

purchasing 147 

systems 13–15, 16–17 

sole sourcing 88–93, 119 

SSCs see shared service centres 

staff 

attracting 122 

shortages, IT 37, 38, 141–2 

wellbeing and HR outsourcing 48 

staff: outsourcing 

effect on staff 109–10, 170, 170–1 

experience and service level 110–11 

informing about 84–8, 194–5 

numbers typically transferred 148, 161 

pensions 180 

rights 154–5, 179–80, 187–99 

statutory obligations 178 

TUPE Regulations 179, 180 

strategy, as driver for outsourcing 103 

sub-contractors 70–1, 182 

supermarkets 

contract manufacturing 52 

and insourcing 53 

suppliers see service providers 

Swiss Bank 29 

Tasco Europe 61–2 

technological developments 

as drivers of outsourcing 121 

impact of 5 

internet and 63–4 

as maximizers of performance 130 

software systems 13–15, 16–17 

tendering 


88–93, 119 

see also requests for proposal 

termination of agreements 182–3 

Tesco 53 

Thames Water 62 

The IT Group, Inc 63 

Time Computers Ltd 52 

timescale, of outsourcing projects 84 

Tiny Computers Ltd 52 

total quality management (TQM) 12 

trade unions 19, 194 

Transfer of Undertakings (Protection of 

Employment) Regulations 1981 see 

TUPE Regulations 

transformational outsourcing 28 

transition period 84–8, 109, 155, 161, 170 

describing in contract 181–2 

managing 168–9 

transitional outsourcing 28 

Trillium 50 

TUPE Regulations 179, 180, 187–99 

Union Carbide 61 

unions see trade unions 

Unisys 88 

United Assurance 50 

virtual organizations 29–30, 129 

wealth creation 11 

Whirlpool 61 

Yankelovich Partners 41

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